##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



(Mark One)



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



For the Quarterly Period Ended September 30, 2003



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number 0-30189



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VYYO INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 94-3241270                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|4015 Miranda Avenue, First Floor, Palo Alto, California        |  | 94304                                  
|(Address of Principal Executive Offices)                       |  | (Zip Code)                             



Registrants
telephone number, including area code 650-319-4000



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).  Yes ̈No  x



As of October 28, 2003, there were 12,730,560 shares of Common Stock ($0.0001 par
value) outstanding.



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##### Table of Contents

INDEX



VYYO INC.



|                              |  |                                                                                                                       |  | Page No.
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I. FINANCIAL INFORMATION |  |                                                                                                                      
|                              |  |                                                                                                                      
|Item 1.                       |  | Condensed Consolidated Financial Statements (Unaudited)                                                               |  |         
|                              |  |                                                                                                                      
|                              |  | Condensed consolidated balance sheets-September 30, 2003 and December 31, 2002                                        |  | 3       
|                              |  |                                                                                                                      
|                              |  | Condensed consolidated statements of operations-three and nine months ended September 30, 2003 and September 30, 2002 |  | 4       
|                              |  |                                                                                                                      
|                              |  | Condensed consolidated statements of cash flows-nine months ended September 30, 2003 and September 30, 2002           |  | 5       
|                              |  |                                                                                                                      
|                              |  | Notes to condensed consolidated financial statements                                                                  |  | 6       
|                              |  |                                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 16      
|                              |  |                                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 35      
|                              |  |                                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                                               |  | 36      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                      
|                              |  |                                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                                     |  | 37      
|                              |  |                                                                                                                      
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                             |  | 37      
|                              |  |                                                                                                                      
|Item 3.                       |  | Defaults upon Senior Securities                                                                                       |  | 37      
|                              |  |                                                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 37      
|                              |  |                                                                                                                      
|Item 5.                       |  | Other Information                                                                                                     |  | 38      
|                              |  |                                                                                                                      
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                      |  | 38      
|                              | 
|SIGNATURES.                   |  | 39                                                                                                                   



2



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##### Table of Contents

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements



Vyyo Inc.

Condensed Consolidated Balance Sheets

(In Thousands)



|                                                                                                                                                                                                      |             | September 30, 2003 |          |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------ | -------- | - | ----------------- | -
|                                                                                                                                                                                                      |             |                   
|                                                                                                                                                                                                      | (Unaudited) |                    |          |   |                  
|Assets                                                                                                                                                                                                |             |                    |          |   |                   |  
|                                                                                                                                                                                                      |             |                   
|CURRENT ASSETS:                                                                                                                                                                                       |             |                    |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                                             |             | $                  | 11,173   |   |                   | $
|Short-term investments                                                                                                                                                                                |             |                    | 50,436   |   |                   |  
|Accounts receivable                                                                                                                                                                                   |             |                    | 981      |   |                   |  
|Inventories (note 2)                                                                                                                                                                                  |             |                    | 820      |   |                   |  
|Other                                                                                                                                                                                                 |             |                    | 732      |   |                   |  
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|Total current assets                                                                                                                                                                                  |             |                    | 64,142   |   |                   |  
|                                                                                                                                                                                                      |             |                   
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                           |             |                    | 938      |   |                   |  
|GOODWILL (note 3)                                                                                                                                                                                     |             |                    |         |   |                   |  
|IDENTIFIABLE INTANGIBLE ASSETS (note 3)                                                                                                                                                               |             |                    |         |   |                   |  
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|Total assets                                                                                                                                                                                          |             | $                  | 65,080   |   |                   | $
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|Liabilities and stockholders equity                                                                                                                                                                  |             |                    |          |   |                   |  
|                                                                                                                                                                                                      |             |                   
|CURRENT LIABILITIES:                                                                                                                                                                                  |             |                    |          |   |                   |  
|Accounts payable                                                                                                                                                                                      |             | $                  | 1,687    |   |                   | $
|Accrued liabilities (note 4)                                                                                                                                                                          |             |                    | 6,603    |   |                   |  
|Accrued restructuring liability (note 4)                                                                                                                                                              |             |                    | 35       |   |                   |  
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|Total current liabilities                                                                                                                                                                             |             |                    | 8,325    |   |                   |  
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|CONTINGENCIES (note 5)                                                                                                                                                                                |             |                    |          |   |                   |  
|                                                                                                                                                                                                      |             |                   
|STOCKHOLDERS EQUITY:                                                                                                                                                                                 |             |                    |          |   |                   |  
|Common stock, $0.0001 par value and paid in capital; 200,000,000 shares authorized; 12,730,560 and 12,545,036 shares issued and
outstanding at September 30, 2003 and December 31, 2002, respectively |             |                    | 229,414  |   |                   |  
|Notes receivable from stockholders                                                                                                                                                                    |             |                    | (1,037   | ) |                   |  
|Accumulated other comprehensive income                                                                                                                                                                |             |                    | (3       | ) |                   |  
|Accumulated deficit                                                                                                                                                                                   |             |                    | (171,619 | ) |                   |  
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|Total stockholders equity                                                                                                                                                                            |             |                    | 56,755   |   |                   |  
|                                                                                                                                                                                                      |             |                    |          |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                                            |             | $                  | 65,080   |   |                   | $
|                                                                                                                                                                                                      |             |                    |          |   |                   |  



The accompanying notes are an
integral part of these Condensed Consolidated Financial Statements.



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##### Table of Contents

Vyyo Inc.

Condensed Consolidated Statements of Operations

(In Thousands Except Per Share Data)

(Unaudited)



|                                                                      |  | Three Months endedSeptember 30, |        |   | Nine Months endedSeptember 30, |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                      |  | 2003                            |        |   | 2002                           |  
|NET REVENUES (note 8)                                                 |  | $                               | 2,223  |   |                                | $
|COST OF REVENUES                                                      |  |                                 | 690    |   |                                |  
|                                                                      |  |                                 |        |   |                                |  
|GROSS PROFIT                                                          |  |                                 | 1,533  |   |                                |  
|                                                                      |  |                                 |        |   |                                |  
|OPERATING EXPENSES:                                                   |  |                                 |        |   |                                |  
|Research and development, net                                         |  |                                 | 1,083  |   |                                |  
|Selling and marketing                                                 |  |                                 | 1,124  |   |                                |  
|General and administrative                                            |  |                                 | 995    |   |                                |  
|Charge for restructuring                                              |  |                                 | (24    | ) |                                |  
|                                                                      |  |                                 |        |   |                                |  
|Total operating expenses                                              |  |                                 | 3,178  |   |                                |  
|                                                                      |  |                                 |        |   |                                |  
|OPERATING LOSS                                                        |  |                                 | (1,645 | ) |                                |  
|INTEREST INCOME, net                                                  |  |                                 | 329    |   |                                |  
|                                                                      |  |                                 |        |   |                                |  
|NET LOSS FROM CONTINUING OPERATIONS                                   |  |                                 | (1,316 | ) |                                |  
|DISCONTINUED OPERATIONS (note 3)                                      |  |                                 | (1,276 | ) |                                |  
|                                                                      |  |                                 |        |   |                                |  
|NET LOSS                                                              |  | $                               | (2,592 | ) |                                | $
|                                                                      |  |                                 |        |   |                                |  
|NET LOSS PER COMMON SHARE -                                           |  |                                 |        |   |                                |  
|Basic and diluted:                                                    |  |                                 |        |   |                                |  
|Continuing operations                                                 |  | $                               | (0.10  | ) |                                | $
|Discontinued operations                                               |  |                                 | (0.10  | ) |                                |  
|                                                                      |  |                                 |        |   |                                |  
|                                                                      |  | $                               | (0.20  | ) |                                | $
|                                                                      |  |                                 |        |   |                                |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) - |  |                                 |        |   |                                |  
|                                                                      |  |                                 |        |  
|Basic and diluted                                                     |  |                                 | 12,722 |   |                                |  
|                                                                      |  |                                 |        |   |                                |  



The accompanying notes are an
integral part of these Condensed Consolidated Financial Statements.



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Vyyo Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



|                                                                            |  | Nine Months ended September 30, |        
|--------------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                            |  | 2003                            |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                                 |        
|Net loss                                                                    |  | $                               | (11,995
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |        
|Income and expenses not involving cash flows:                               |  |                                 |        
|Depreciation and amortization                                               |  |                                 | 1,103  
|Impairment of identifiable intangible assets and property and equipment     |  |                                 | 2,224  
|Impairment of goodwill                                                      |  |                                 | 420    
|Amortization and charge related to stock compensation                       |  |                                 | 136    
|Capital gain on sale of fixed assets                                        |  |                                 | (1     
|Changes in assets and liabilities:                                          |  |                                 |        
|Accounts receivable                                                         |  |                                 | (684   
|Other current assets                                                        |  |                                 | (195   
|Inventories                                                                 |  |                                 | (741   
|Accounts payable                                                            |  |                                 | 722    
|Accrued liabilities                                                         |  |                                 | 815    
|Restructuring liabilities                                                   |  |                                 | (2,079 
|                                                                            |  |                                 |        
|Net cash used in operating activities                                       |  |                                 | (10,275
|                                                                            |  |                                 |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                                 |        
|Purchase of property and equipment                                          |  |                                 | (277   
|Proceeds from sale of property and equipment                                |  |                                 | 1      
|Net cash used in the purchase of Shira Computers Ltd.                       |  |                                 |        
|Purchase of short-term investments                                          |  |                                 | (60,688
|Proceeds from sales and maturities of short-term investments                |  |                                 | 67,178 
|                                                                            |  |                                 |        
|Net cash provided by investing activities                                   |  |                                 | 6,214  
|                                                                            |  |                                 |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                                 |        
|Issuance of common stock                                                    |  |                                 | 163    
|Proceeds from short term credit                                             |  |                                 |        
|Loan to former Chief Executive Officer                                      |  |                                 |        
|                                                                            |  |                                 |        
|Net cash provided by (used in) financing activities                         |  |                                 | 163    
|                                                                            |  |                                 |        
|Increase (decrease) in cash and cash equivalents                            |  |                                 | (3,898 
|Cash and cash equivalents at beginning of period                            |  |                                 | 15,071 
|                                                                            |  |                                 |        
|Cash and cash equivalents at end of period                                  |  |                                 | 11,173 
|                                                                            |  |                                 |        
|Non-cash financing activities:                                              |  |                                 |        
|Issuance of common stock for notes receivable                               |  |                                 |        
|                                                                            |  |                                 |        



The accompanying notes are an
integral part of these Condensed Consolidated Financial Statements.



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Vyyo Inc.



Notes to Condensed
Consolidated Financial Statements

(Unaudited)



1. Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of Vyyo Inc. have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not
necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the annual report on Form 10-K
for the year ended December 31, 2002, filed with the Securities and Exchange Commission.



Organization and Principles of Consolidation



The consolidated financial statements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries (collectively, Vyyo
or the Company). With respect to Shira Computers Ltd. (Shira), see note 3. All material intercompany balances and transactions have been eliminated in consolidation.



Accounting Principles



The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) in the United States.



Use of Estimates



The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Inventory



Inventory is valued at the lower of cost or market. Cost includes the cost of raw materials computed using
the moving average basis and, for work in progress and finished goods, direct labor and an appropriate proportion of production overhead. Market is determined by reference to the sales proceeds of items sold in the ordinary course of business or
management estimates based on prevailing market conditions.



During the year 2001, the Company recognized a write-down of excess inventory and purchase commitments of $8.45 million. The write-down was charged to the cost of revenues. In the three and nine months ended September
30, 2003, inventory that was previously written-down to $0 by taking a charge of $588,000 and $1,335,000, respectively, was sold for the amount of $897,000 and $2,522,000, respectively. In the three and nine months ended September 30, 2002,
inventory that was previously written-down to $0 by taking a charge of $233,000 and $900,000, respectively, was sold for the amount of $333,000 and $981,000, respectively.



Impairment of Long-Lived Assets



The Company adopted in 2002 SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 requires that long-lived assets including certain intangible assets, to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would
be recognized, and the assets are written down to their estimated fair values.



The Company performed an impairment test, based on Shiras intangible assets, property and equipment as of June 30, 2003. The impairment test resulted in impairment charges of $2,224,000 (see also note 3(b)).



Goodwill



On January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 supersedes Accounting Principles Board Opinion (APB) No. 17, Intangible Assets. Among the most significant changes made by SFAS No. 142 are: (i) goodwill and
intangible assets with indefinite lives will no longer be amortized; and (ii) goodwill and intangible assets deemed to have an indefinite life will be tested for impairment at least annually and whenever events or changes in circumstances indicate
that the carrying amount of the goodwill may not be recoverable.



The Company identified its various reporting units, which consist of its operating segments. The Company has utilized expected future discounted cash flows to determine the fair value of the reporting units and
whether any impairment of goodwill existed.



The Companys goodwill is allocated to the Software Products segment.



As described in note 3(b) below, the Company performed a goodwill impairment test, based on Shiras valuation as of June 30, 2003.
The impairment test resulted in an impairment charge of $420,000.



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Revenue Recognition



Net revenues from the Companys fixed broadband wireless segment include product revenues and
technology development or license revenues. Product revenues are derived primarily from sales of hubs and modems initially sold as a package to telecommunications service providers and to system integrators. Revenues from these products and from
associated services are generally recorded when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and customer acceptance requirements have been met, (iii) the price is fixed or determinable, and (iv) collection of payment
is reasonably assured and the Company has no additional obligations. The Company accrues for estimated sales returns and exchanges and product warranty and liability costs upon recognition of product revenues.



Technology development revenues are related to best efforts
arrangements with customers and license revenue for developed technology. Due to technology risk factors, the costs of the technology development efforts are expensed when incurred and revenues are recognized when the applicable customer milestones
are met, including deliverables, but not in excess of the estimated amount that would be recognized using the percentage-of-completion method. As for license revenues, the costs are expensed when incurred and revenues are recognized when the license
technology is delivered.



Net revenues from the
Companys Software Products segment (as defined in note 3 below) are comprised of software products and software license fees. Revenue allocated to software is recognized when persuasive evidence of an arrangement exists, delivery has occurred,
the price is fixed or determinable, and collectibility is probable.



The Company and its subsidiaries provide for warranty costs at the same time as the revenue is recognized. The provision is calculated as a percentage of the sales, based on historical experience.



Loss per Share



Basic and diluted net losses per share are presented in
accordance with FAS No. 128, Earnings per share (FAS 128), for all periods presented.



Employee Stock Based Compensation



The Company accounts for employee stock based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations. Charge for stock compensation represents the amortization of deferred compensation charges, which are based on the aggregate differences between the respective
exercise price of stock options and purchase price of stock at their dates of grant or sale and the deemed fair market value of the common stock for accounting purposes. Deferred stock compensation is amortized over the vesting period of the
underlying options.



Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), established a fair value based method of accounting for employee stock options or similar equity instruments, and encourages adoption of
such method for stock compensation plans. However, it also allows companies to continue to account for those plans using the accounting treatment prescribed by APB No. 25. The Company has elected to continue accounting for employee stock option
plans according to APB No. 25 and accordingly discloses pro forma data assuming the Company had accounted for employee stock option grants using the fair value based method as defined in SFAS No. 123.



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Employee Stock Based Compensation (continued)



Pro forma information regarding net loss required under SFAS
No. 148 has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The pro forma net loss per share below reflects both (i) the charge for stock included in the historical net loss and (ii)
the expense allocation based on the SFAS No. 123 calculation. The fair value for stock options was estimated at the date of each option grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three
and nine months ended September 30, 2003 and 2002: risk-free interest rates ranging from 1.09% to 4.57%; dividend yields of zero; weighted-average expected life of the options of approximately 4.19, 1.5, 4.05 and 3.07 years; and volatility
ranging from 0.66 to 1.21.



The Companys pro forma
information is as follows:



|                                                                                                          |  | Three Months endedSeptember 30,      |        |   | Nine Months endedSeptember 30,       |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | -
|                                                                                                          |  | 2003                                 |        |   | 2002                                 |  
|                                                                                                          |  | In thousands (except per share data) |        |   | In thousands (except per share data) |  
|Net loss from continuing operations as reported                                                           |  | $                                    | (1,316 | ) |                                      | $
|Deduct: stock based employee compensation expense, included in reported net loss                          |  |                                      | 136    |   |                                      |  
|Add: stock based employee compensation expense determined under fair value method for all awards          |  |                                      | (538   | ) |                                      |  
|                                                                                                          |  |                                      |        |   |                                      |  
|Pro Forma net loss from continuing operations                                                             |  | $                                    | (1,718 | ) |                                      | $
|                                                                                                          |  |                                      |        |   |                                      |  
|                                                                                                          |  |                                      |        |  
|Loss from discontinued operations as reported                                                             |  | $                                    | (1,276 | ) |                                      | $
|Add: stock based employee compensation income (expense) determined under fair value method for all awards |  |                                      | 1      |   |                                      |  
|                                                                                                          |  |                                      |        |   |                                      |  
|Pro Forma loss from discontinued operations                                                               |  | $                                    | (1,275 | ) |                                      | $
|                                                                                                          |  |                                      |        |   |                                      |  
|Pro forma net loss                                                                                        |  | $                                    | (2,993 | ) |                                      | $
|                                                                                                          |  |                                      |        |   |                                      |  
|Basic and diluted loss per share:                                                                         |  |                                      |        |   |                                      |  
|As reported:                                                                                              |  |                                      |        |   |                                      |  
|Continuing operations                                                                                     |  | $                                    | (0.10  | ) |                                      | $
|Discontinued operations                                                                                   |  |                                      | (0.10  | ) |                                      |  
|                                                                                                          |  |                                      |        |   |                                      |  
|                                                                                                          |  | $                                    | (0.20  | ) |                                      | $
|                                                                                                          |  |                                      |        |   |                                      |  
|Proforma:                                                                                                 |  |                                      |        |   |                                      |  
|Continuing operations                                                                                     |  | $                                    | (0.14  | ) |                                      | $
|Discontinued operations                                                                                   |  |                                      | (0.10  | ) |                                      |  
|                                                                                                          |  |                                      |        |   |                                      |  
|                                                                                                          |  | $                                    | (0.24  | ) |                                      | $
|                                                                                                          |  |                                      |        |   |                                      |  



Reclassifications



Certain comparative figures have been
reclassified to conform to the current year presentation.



2. Inventories



Inventory is comprised of the following:



|                |  | September 30, 2003 |     | December 31, 2002
|--------------- |  | ------------------ | --- | -----------------
|                | 
|                |  | In thousands      
|Raw materials   |  | $                  | 345 |                  
|Work in process |  |                    | 255 |                  
|Finished goods  |  |                    | 220 |                  
|                |  |                    |     |                  
|                |  | $                  | 820 |                  
|                |  |                    |     |                  



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. Shira  Discontinued Operations



| | (a) | On May 14, 2002, the Company acquired all of the outstanding ordinary shares of Shira Computers Ltd. (Shira), an Israeli privately held company that provides software
products for the prepress and publishing markets (the Software Products segment).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market, on August 12, 2003, the
Companys Board of Directors determined to cease substantially all of Shiras business operations and terminate substantially all of Shiras employees. On August 14, 2003, Shiras remaining employees were terminated.



The cessation of Shiras operations represents a disposal of a
business segment under SFAS 144. Accordingly, current period results of the software segment have been classified as discontinued operations, and prior periods have been reclassified respectively.



Assets and liabilities of the discontinued operation were as follows:



|                               |  | September 30, 2003 |       | December 31, 2002
|------------------------------ |  | ------------------ | ----- | -----------------
|                               |  | In thousands      
|Current Assets                 |  | $                  | 161   |                  
|                               |  |                    |       |                  
|Fixed Assets                   |  | $                  | 72    |                  
|                               |  |                    |       |                  
|Goodwill                       |  | $                  |      |                  
|                               |  |                    |       |                  
|Identifiable intangible assets |  | $                  |      |                  
|                               |  |                    |       |                  
|Current liabilities *          |  | $                  | 1,571 |                  
|                               |  |                    |       |                  

---

|* | As of September 30, 2003, current liabilities included a provision for severance pay expenses and termination of contractual obligations in the amount of $340,000 which will be paid
in the forth quarter of 2003.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Profit and loss of
the discontinued operations were as follows:



|                                      |  | Three MonthsendedSeptember 30, |       |      | Nine MonthsendedSeptember 30, |      
|------------------------------------- |  | ------------------------------ | ----- | ---- | ----------------------------- | -----
|                                      |  | 2003                           |       | 2002 |                               |      
|                                      |  | In thousands                   |       |      | In thousands                  |      
|Net revenues                          |  | $                              | 80    |      | $                             | 151  
|Cost of revenues                      |  |                                | 28    |      |                               | 286  
|                                      |  |                                |       |      |                               |      
|Gross profit (loss)                   |  |                                | 52    |      |                               | (135 
|                                      |  |                                |       |      |                               |      
|Loss from operations                  |  |                                | 1,273 |      |                               | 966  
|Interest expenses, net                |  |                                | 3     |      |                               | 37   
|                                      |  |                                |       |      |                               |      
|Net loss from discontinued operations |  | $                              | 1,276 |      | $                             | 1,003
|                                      |  |                                |       |      |                               |      



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. Shira - Discontinued Operations (continued)



Loss from discontinued operations includes:



| | (1) | The Company amortized the identifiable intangible assets over a period of three years. The amortization of identifiable assets is as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------



|                    |  | Three MonthsendedSeptember 30, |     | Nine MonthsendedSeptember 30,
|------------------- |  | ------------------------------ | --- | -----------------------------
|                    |  | 2002                           |     | 2003                         
|                    |  | In thousands                   |     | In thousands                 
|Acquired technology |  | $                              | 229 |                              
|Customers list      |  |                                | 30  |                              
|                    |  |                                |     |                              
|                    |  | $                              | 259 |                              
|                    |  |                                |     |                              



| | (2) | Impairment charges of $2,644,000 see b below
| | --- | --------------------------------------------



| | (3) | Severance expenses and termination of contractual obligations as follows:
| | --- | -------------------------------------------------------------------------



|                                         |  | Severanceexpenses |      |   | Termination ofcontractualobligations |   | Total | 
|---------------------------------------- |  | ----------------- | ---- | - | ------------------------------------ | - | ----- | 
|                                         |  | In thousands      |     
|Provision as of June 30, 2003            |  | $                 | 271  |   |                                      | $ |      | 
|Expenses incurred in the period          |  |                   | 181  |   |                                      |   | 146   | 
|                                         |  |                   |      |   |                                      |   |       | 
|Total expenses                           |  |                   | 452  |   |                                      |   | 146   | 
|Incurred expenses paid during the period |  |                   | (258 | ) |                                      |   |       | 
|                                         |  |                   |      |   |                                      |   |       | 
|Balance as of September 30, 2003         |  | $                 | 194  |   |                                      | $ | 146   | 
|                                         |  |                   |      |   |                                      |   |       | 



| | (b) | Due to the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market, the Company performed an impairment test, based on the
valuation of Shiras operations and its tangible and intangible assets as of June 30, 2003. The impairment test resulted in impairment charges of $2,644,000, out of which $1,831,000 related to the acquired technology, $227,000 related to the
customer list, $420,000 related to the goodwill recorded upon Shiras acquisition and $166,000 related to property and equipment. The impairment charges were based on the fair value of the related assets, which were calculated based on the
present value of the related cash flows.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
changes in the amount of identifiable intangible assets and in the carrying amount of goodwill for the period of nine months ended September 30, 2003 are as follows:



|                                 |  | Acquiredtechnology |        |   | Customerlist |   |      | Goodwill | 
|-------------------------------- |  | ------------------ | ------ | - | ------------ | - | ---- | -------- | 
|                                 |  | In thousands       |       
|Balance as of January 1, 2003    |  | $                  | 2,287  |   |              | $ | 287  |          | 
|Amortization                     |  |                    | (456   | ) |              |   | (60  | )        | 
|Impairment in June 30, 2003      |  |                    | (1,831 | ) |              |   | (227 | )        | 
|                                 |  |                    |        |   |              |   |      |          | 
|Balance as of September 30, 2003 |  | $                  |       |   |              | $ |     |          | 
|                                 |  |                    |        |   |              |   |      |          | 



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



4. Current Liabilities



Accrued liabilities consist of the following:



|                          |  | September 30, 2003 |       | December 31, 2002
|------------------------- |  | ------------------ | ----- | -----------------
|                          |  | In thousands      
|Compensation and benefits |  | $                  | 1,889 |                  
|Withholding tax           |  |                    | 1,678 |                  
|Royalties                 |  |                    | 943   |                  
|Warranty *                |  |                    | 472   |                  
|Other                     |  |                    | 1,621 |                  
|                          |  |                    |       |                  
|                          |  | $                  | 6,603 |                  
|                          |  |                    |       |                  

---

|* | The changes in the balance during the periods are comprised of the following:
|- | -----------------------------------------------------------------------------



|                                                         |  | Nine MonthsendedSeptember 30, |      |   | Year endedDecember 31, |  
|-------------------------------------------------------- |  | ----------------------------- | ---- | - | ---------------------- | -
|                                                         |  | 2003                          |      |   | 2002                   |  
|                                                         |  | In thousands                  |     
|Balance at beginning of period                           |  | $                             | 395  |   |                        | $
|Liability acquired upon Shira acquisition                |  |                               |      |   |                        |  
|Payments made under the warranty                         |  |                               |      |   |                        |  
|Product warranty issued for new sales                    |  |                               | 318  |   |                        |  
|Changes in accrual in respect of warranty periods ending |  |                               | (241 | ) |                        |  
|                                                         |  |                               |      |   |                        |  
|Balance at end the of period                             |  | $                             | 472  |   |                        | $
|                                                         |  |                               |      |   |                        |  

|
|

Accrued restructuring liability



In 2001, the Company implemented a restructuring program to
reduce operating expenses. The Company recorded charges of $12.8 million, related to excess facilities, abandoned equipment and employees severance and other related benefits due to a reduction of approximately 180 employees, or approximately
75% of the Companys workforce. In the three and nine months ended September 30, 2003, the Company recorded a restructuring income of $24,000, comprised of a positive adjustment of $160,000 adjustment less $136,000 in compensation charges with
respect to variable compensation plan related to our former Chief Executive Officer (see note 6). In the three and nine months ended September 30, 2003, the Company utilized $35,000 and $1,919,000 from the restructuring expenses, respectively. The
remaining restructuring liability balance to be utilized relates to the Companys anticipated loss under a noncancelable lease agreement until it expires at the end of 2003.



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



5. Contingencies



Patent matter



In early 1999 and in April 2000, the Company received written notices from Hybrid Networks, Inc. (Hybrid), a former competitor
whose assets were acquired by ioWave Inc. in 2002, in which Hybrid claimed to have patent rights in certain technology and requested that the Company review its products in light of eleven of Hybrids issued patents. The Company, with the
advice of its legal counsel, believes that these patents are invalid or are not infringed by the Companys products. However, Hybrids successor, ioWave Inc., may pursue litigation with respect to these or other claims. The results of any
litigation are inherently uncertain. Any successful infringement claim or litigation against the Company could have a significant adverse impact on the Companys operating results, cash flows and financial condition. No provision has been
included in the financial statements.



Legal Claims
regarding breach of leasing agreements



In
2001, Har Hotzvim Properties Ltd. (Har Hotzvim) filed a claim against our subsidiary, Vyyo Ltd., and the Company in the Jerusalem, Israel, District Court, alleging that Vyyo Ltd. and the Company breached obligations under a lease
agreement and an amendment thereto between Vyyo Ltd. and Har Hotzvim. The complaint sought damages in the amount of 10 million New Israeli Shekels, or NIS, or approximately $2.2 million; however, this amount was claimed for purposes of court fees,
and the actual amount sought in Har Hotzvims statement of claim was NIS 37 million, or approximately $8.2 million (the Har Hotzvim Claim). In connection with this dispute, Vyyo Ltd. also filed a claim in July 2001 against Har
Hotzvim, claiming that Har Hotzvims actions constituted a breach of its obligations under the lease agreement. The court was requested to order Har Hotzvim to reimburse Vyyo Ltd. for its expenses in complying with the lease agreement in an
aggregate amount of approximately NIS 8.7 million (the Vyyo Ltd. Claim).



On January 29, 2003, Har Hotzvim, Vyyo Ltd. and the Company entered into a settlement agreement (the Settlement Agreement),
pursuant to which the parties agreed to dismiss the Har Hotzvim Claim and the Vyyo Ltd. Claim against a payment of $1.8 million from the Company to Har Hotzvim. Har Hotzvim, Vyyo Ltd. and the Company waived any and all claims against each other in
connection with this dispute. On February 2, 2003, the District Court of Jerusalem approved and validated the Settlement Agreement. The Company has paid the agreed amount under the Settlement Agreement.



Former employees claims



The Company is involved in litigation with former employees
in a total amount of approximately $60,000. The Companys management believes that the provision included in the financial statements as of September 30, 2003 is sufficient to cover the Companys exposure deriving from these claims.



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



6. Former Chief Executive Officer (Former CEO) separation agreement



In April 2002, pursuant to a separation agreement entered
into in October 2001, the Companys Former CEO drew down on the $1,000,000 loan provided for in the separation agreement. This loan is due on January 1, 2006, or earlier upon sales of the Companys shares held by such officer or upon
certain other circumstances. The loan is secured solely by the 266,667 options held by such officer and the shares of the Companys common stock underlying these options.



Combined accounting is being done related to the 266,667 options issued and the related $1 million loan
secured by such options. This results in variable accounting for the 266,667 options, with a minimum expense being recorded of $1 million. The total charge for the three months ended September 30, 2003 and 2002 associated with these options were
$136,000 and $0, respectively, and for the nine months ended September 30, 2003 and 2002 were expense of $136,000 and an income of $152,000, respectively. The charges were recorded under restructuring charges.



7. Comprehensive Loss



The components of comprehensive loss are as follows (in thousands):



|                                                 |  | Three Months endedSeptember 30, |        |   | Nine Months endedSeptember 30, |  
|------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                 |  | 2003                            |        |   | 2002                           |  
|                                                 |  | In thousands                    |        |   | In thousands                   |  
|Net loss                                         |  | $                               | (2,592 | ) |                                | $
|Unrealized loss on available-for-sale securities |  |                                 | (118   | ) |                                |  
|                                                 |  |                                 |        |   |                                |  
|Comprehensive loss                               |  | $                               | (2,710 | ) |                                | $
|                                                 |  |                                 |        |   |                                |  



8. Segment Reporting



Following the cessation of business
operation of Shira, as described in note 3 above, the Company has one business segment: Fixed broadband wireless.



Sales to major customers:



|              |  | Three Months ended September 30, |   |  | Nine Months ended September 30, |  
|------------- |  | -------------------------------- | - |  | ------------------------------- | -
|              |  | 2003                             |   |  | 2002                            |  
|Net revenues: |  |                                  |   |  |                                 |  
|              |  |                                  |   | 
|Customer A    |  | 53                               | % |  | 11                              | %
|              |  |                                  |   | 
|Customer B    |  | 22                               | % |  |                                 |  
|              |  |                                  |   | 
|Customer C    |  | 10                               | % |  | 37                              | %
|              |  |                                  |   | 
|Customer D    |  | 9                                | % |  | 24                              | %
|              |  |                                  |   | 
|Customer E    |  |                                  |   |  | 15                              | %



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



9. Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation of Variable Interest
Entities (FIN 46). Under FIN 46, entities are separated into two populations: (1) those for which voting interests are used to determine consolidation (this is the most common situation) and (2) those for which variable interests are used to
determine consolidation. FIN 46 explains how to identify Variable Interest Entities (VIE) and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its
consolidated financial statements. FIN 46 is effective as follows: for variable interests in variable interest entities created after January 31, 2003, FIN 46 shall apply immediately, for variable interests in variable interest entities created
before that date, FIN 46 shall apply - for calendar year-end company - as of December 31, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its consolidated financial statements.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following information should be read in conjunction with the condensed consolidated interim financial statements and the notes thereto in Part I,
Item 1 of this Quarterly Report and with Managements Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2002, contained in Vyyos Annual Report (Form 10-K) for the year ended December
31, 2002, filed with the Securities and Exchange Commission. The matters addressed in this Managements Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, may
contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Vyyos actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, without limitation, those set forth under the heading Risk Factors following this Managements Discussion and Analysis section, and elsewhere in this report.



Overview



In 2001, the global telecommunications market, and in particular the fixed
wireless broadband access market, experienced a significant downturn that has continued throughout 2002 and to the present. We experienced dramatic decreases in the sales of our products and the adoption of our technology in 2001, and our sales have
continued at a reduced level through the third quarter of 2003. While we expect that the telecommunications market may recover over time, any such recovery may occur only slowly. If the market does not recover in the near future and if our sales do
not substantially increase from current levels, we will continue to incur losses, and may never achieve profitability.



While we are continuing to operate our traditional wireless business and have increased our sales and marketing efforts and research and development
efforts to address the China market and other new markets. We also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. We have invested, and we expect that we will
continue to invest, significant time and resources searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.



We supply broadband wireless access systems used by telecommunications
service providers to deliver wireless, high-speed data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our systems as part of their end-to-end
network solutions for service providers. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $12 million for the nine months ended
September 30, 2003. As of September 30, 2003, our accumulated deficit was approximately $172 million.



On May 14, 2002, Vyyo acquired all of the outstanding ordinary shares of Shira Computers Ltd. (Shira), an Israeli privately held company that
provides software products for the prepress and publishing markets (the Software Products segment).



Due to the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market, on August 12, 2003,
Vyyos Board of Directors determined to cease substantially all of Shiras business operations and terminate substantially all of Shiras employees. On August 14, 2003, Shiras remaining employees were terminated.



The cessation of Shiras operations represents a disposal of a business
segment under SFAS 144. Accordingly, current period results of the software segment have been classified as discontinued operations, and prior periods have been reclassified respectively.



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##### Table of Contents

Critical Accounting Policies



The discussion and analysis of our financial conditions and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported assets and
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumption and conditions.



Our significant accounting policies are described in the notes to the annual
consolidated financial statements as of and for the year ended December 31, 2002. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We believe our most
critical accounting policies include the following:



Inventory Valuation. In 2001, due to the dramatic slowdown in the telecommunications sector and the economy in general, we recorded a write-down of excess inventory and purchase commitments of $8.45 million. Our estimate was based on
our expectations for sales of our products in the foreseeable future due to the uncertainty of selling our existing products if and when the market recovers. In the three and nine months ended September 30, 2003, inventory that was previously
written-down to $0 by taking a charge of $588,000 and $1.3 million, respectively, was sold for the amount of $897,000 and $2.5 million, respectively.



Restructuring expenses.In 2001, we implemented a restructuring program that resulted in a reduction in force of approximately 75% of our employees
and in excess facilities and equipment, and accordingly, we recorded a charge of $12.8 million. In the three and nine months ended September 30, 2003, we utilized $35,000 and $1.9 million from the restructuring expenses, respectively. In the three
and nine months ended September 30, 2003, we recorded a restructuring income item of $24,000, comprised of a $160,000 adjustment less $136,000 in compensation charges with respect to a variable compensation plan related to our former Chief Executive
Officer. The remaining restructuring liability balance to be utilized relates to the Companys anticipated loss under a noncancelable lease agreement expiring at the end of 2003.



Valuation of Identifiable Intangible Assets and Goodwill.Upon the acquisition of Shira, we recorded identifiable
intangible assets of $3,091,000 and goodwill of $820,000. We amortized the identifiable intangible assets over a period of three years. We assessed the identifiable intangible assets and goodwill for recoverability through the estimated future cash
flows resulting from the use of the assets. Our assessment for recoverability, based on Shiras valuation as of June 30, 2003, resulted in impairment charges of $2,644,000, out of which $1,831,000 related to the acquired technology, $227,000
related to the customer list, $420,000 related to the goodwill recorded upon Shiras acquisition and $166,000 related to property and equipment.



Products Warranty. We accrue for estimated sales returns and exchanges and product warranty costs upon recognition of product revenues. The annual
provision is calculated as a percentage of the sales based on historical experience according to the obligations to customers.



This discussion and analysis should be read in conjunction with our condensed consolidated interim financial statements and related notes included
elsewhere in this report.



Results of Operations



Net Revenues



Net revenues from fixed broadband wireless include product revenues and technology developments or license revenues. Net
revenues are derived from sales of hubs and modems initially sold as a package to telecommunications service providers and to system integrators. Revenues from these products and from associated services are generally recorded when (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred and customer acceptance requirements have been met, (iii) the price is fixed or determinable, and (iv) collection of payment is reasonably assured and we have no additional obligations.
We accrue for estimated sales returns and exchanges and product warranty and liability costs upon recognition of product revenues.



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##### Table of Contents

Technology development revenues are related to best efforts arrangements with customers and license
revenue for developed technology. Due to technology risk factors, the costs of the technology development efforts are expensed when incurred and revenues are recognized when the applicable customer milestones are met, including deliverables, but not
in excess of the estimated amount that would be recognized using the percentage-of-completion method. As for license revenues, the costs are expensed when incurred and revenues are recognized when the licensed technology is delivered.



Our revenue is concentrated among relatively few customers. Though our
principal revenue-generating customers are likely to vary on a quarterly basis, we anticipate that our revenues will remain concentrated among a few customers for the foreseeable future.



Net revenues increased by 187% to $2.2 million in the third quarter of 2003 from $775,000 in the third quarter of 2002, and
by 16% to $4.4 million in the first nine months of 2003 from $3.8 million in the first nine months of 2002. The increase in revenues in the third quarter and in the first nine months of 2003, primarily reflects the increased shipments of our
products, particularly to the China market. Net revenues include revenues from sales of inventory that was previously written down to $0 in 2001 of approximately $897,000 in the third quarter of 2003 and $333,000 in the third quarter of 2002, and of
approximately $2.5 million in the first nine months of 2003 and $981,000 in the first nine months of 2002. As a result of the write-down in 2001, the cost of revenues associated with the sales of this inventory has been accounted for as $0.



Cost of Revenues



Cost of revenues consists of component and material costs, direct labor
costs, warranty costs, royalties in connection with Israeli government incentive programs and overhead related to manufacturing our products.



Cost of revenues increased to $690,000 in the third quarter of 2003 from an income of $89,000 in the third quarter of 2002, and to $1.2 million in the
first nine months of 2003 from $1.1 million in the first nine months of 2002. The increase in cost of revenues in the third quarter and in the first nine months of 2003, were primarily attributable to the increase in shipments of our products and
purchases of new inventories in order to supply the demand to our products; and a reversal of a warranty accrual in the third quarter of 2002 of $400,000. As a result of the write-down of inventories to $0 in 2001, cost of revenues does not include
$588,000 in the third quarter of 2003 and $233,000 in the third quarter of 2002, and $1.3 million in the first nine months of 2003 and $900,000 in the first nine months of 2002, related to the sale of such inventories. We anticipate that our cost of
revenues will increase, and our gross margin will decrease, in future periods as and to the extent that we deplete our previously written-down inventories and sell products from newly acquired inventories. While we expect that the telecommunications
industry may recover over time, substantial uncertainty exists as to our ability to sell our existing products if and when the market recovers.



Research and Development Expenses



Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities.
Substantially all of our wireless research and development activities are carried out in our facility in Jerusalem, Israel. These expenses are charged to operations as incurred. Our research and development expenses increased to $1.1 million in the
third quarter of 2003 from $1 million in the third quarter of 2002, and decreased to $2.8 million in the first nine months of 2003 from $3.1 million in the first nine months of 2002. The increase in research and development expenses in the third
quarter of 2003 was due to an increase in the third quarter of 2003 in development efforts for new wireless products. The decrease in expenses in the first nine months of 2003 was due to a decrease in expenses in our wireless business in the first
six months of 2003 because of the previous reductions in our workforce and subcontractors, effected in the third and fourth quarters of 2002. Although we have recently increased our research and development expenses, as a result of the previous
decreases in research and development activities, we may be unable to develop next generation products and new products to meet the demands of the market. We anticipate that research and development expenses will increase in future periods as we
increase our efforts to develop new wireless products to address the China market and other new markets.



18



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##### Table of Contents

Selling and Marketing Expenses



Sales and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and
expenses for travel, trade shows and promotional activities. Sales and marketing expenses increased to $1.1 million in the third quarter of 2003 from $721,000 in the third quarter of 2002, and to $2.9 million in the first nine months of 2003 from
$2.7 million in the first nine months of 2002. The increase in sales and marketing expenses in the third quarter and the first nine months of 2003 was due to an increase in the second and third quarter of 2003 in sales efforts for our wireless
products in China and other new markets, including expenses from a marketing agreement with one of our Chinese OEM customers amounting to $660,000. The increase in expenses in the first nine months of 2003 was partially offset by a decrease in
expenses in our wireless business due to previous reductions in the number of sales and marketing personnel and the level of trade show and other promotional activities effected in 2002 in response to the significant downturn in the global
telecommunications industry and the decrease in orders for and sales of our products. As part of this reduction in expenses, we effected a reduction in our sales and marketing workforce in the first quarter of 2002. In connection with this reduction
in the first quarter of 2002, we incurred a one-time charge of approximately $300,000. We anticipate that sales and marketing expenses will increase in future periods as we increase our efforts to sell our products in the China market and other new
markets.



General and Administrative Expenses



General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting, strategic and business development, human resources and legal. General and administrative expenses decreased to $1 million in the third quarter of 2003 from $1.2 million
in the third quarter of 2002, and to $3.6 million in the first nine months of 2003 from $4.2 million in the first nine months of 2002. The decrease in general and administrative expenses in the third quarter and first nine months of 2003 were
primarily due to a decrease in travel expenses, a decrease in insurances expenses and charges for stock compensation of approximately $0 recorded in the first nine months of 2003 and $480,000 recorded in the first nine months of 2002. The decrease
was partially offset by an increase in professional fees in the first nine months of 2003. General and administrative expenses also included expenses of $528,000 for the first nine months of 2003, paid to an unaffiliated third party management
company in connection with several charters of an aircraft for business travel purposes. While we chartered the aircraft directly from the management company, the chartered aircraft is leased by Harmony Management, Inc., of which Davidi Gilo and a
trust for his benefit are the sole shareholders. Payments made by us to the management company for the aircraft charters were ultimately paid to Harmony Management, after deductions for certain operating costs and charter management fees. Harmony
Management has advised us that the hourly rate charged by the management company for these charters was substantially less than the standard rate charged for similar charters to other unaffiliated parties.



Restructuring Charges



In 2001, we implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in
the telecommunications sector and the general economy. In connection with this restructuring, we recorded charges of $12.8 million in 2001. These charges are costs related to excess facilities, abandoned equipment and employees severance and
other related benefits. The restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of our workforce. In the third quarter of 2003, we recorded restructuring income of $24,000, comprised of a positive
adjustment of $160,000 adjustment less $136,000 in compensation charges with respect to a variable compensation plan related to our former Chief Executive Officer. The remaining restructuring liability balance to be utilized relates to the
Companys anticipated loss under a noncancelable lease agreement until it expires at the end of 2003.



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##### Table of Contents

Interest Income, Net



Interest income, net, includes interest and investment income, foreign currency remeasurement gains and losses. Net interest income was $329,000 in the
third quarter of 2003 and $537,000 in the third quarter of 2002, and $1.1 in the first nine months of 2003 and $2.1 million in the first nine months of 2002, mainly from our cash and short-term investment balances from proceeds from our initial and
follow-on public offerings effected in 2000. We expect that our interest income will continue to decrease due to decreasing cash balances and reduced interest rates in financial markets.



Income Taxes



As of December 31, 2002, we had approximately $70 million of Israeli net operating loss carryforwards from our Israeli subsidiaries, $4.7 million of
United States federal net operating loss carryforwards, and $4.3 million of state net operating loss carryforwards. The Israeli net operating loss carryforwards have no expiration date and have not been recorded as tax assets because the losses are
expected to be utilized during a tax exempt period. The United States federal net operating loss carryforwards expire in various amounts between the years 2011 and 2022. The state net operating loss carryforwards expire in various amounts between
the years 2004 and 2007. We have provided a full valuation allowance against our United States federal and state deferred tax assets as the future realization of the tax benefit is not sufficiently assured.



Charge for Stock Based Compensation



Charge for stock compensation represents the amortization of deferred
compensation charges which are based on the aggregate differences between the respective exercise price of stock options and purchase price of stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting
purposes, as well as stock compensation charges incurred in connection with modifications of stock awards in 2001. Deferred stock compensation is amortized over the vesting period of the underlying options. Charges related to stock compensation were
$136,000 in the third quarter of 2003 and $0 in the third quarter of 2002. The charges for stock compensation were $136,000 in the first nine months of 2003 and gross charges of $674,000 in the first nine months of 2002, with a decrease in
compensation of $152,000 related to an accounting variable plan in the first quarter of 2002.



Discontinued Operation



On May 14, 2002, we acquired all of the outstanding ordinary shares of Shira Computers Ltd. (Shira), an Israeli privately held company that provides software products for the prepress and publishing markets (the Software
Products segment).



Due to the continuing decline in
Shiras sales, Shiras recurring losses and its inability to penetrate the market, on August 12, 2003, Vyyos Board of Directors determined to cease substantially all of Shiras business operations and terminate substantially all
of Shiras employees. On August 14, 2003, Shiras remaining employees were terminated.



The cessation of Shiras operations represents a disposal of a business segment under SFAS 144. Accordingly, current period results of the software
segment have been classified as discontinued operations, and prior periods have been reclassified respectively.



20



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##### Table of Contents

Assets and liabilities of the discontinued operations were as follows:



|                               |  | September 30,2003 |       | December 31, 2002
|------------------------------ |  | ----------------- | ----- | -----------------
|                               |  | In thousands     
|Current Assets                 |  | $                 | 161   |                  
|                               |  |                   |       |                  
|Fixed Assets                   |  | $                 | 72    |                  
|                               |  |                   |       |                  
|Goodwill                       |  | $                 |      |                  
|                               |  |                   |       |                  
|Identifiable intangible assets |  | $                 |      |                  
|                               |  |                   |       |                  
|Current liabilities *          |  | $                 | 1,571 |                  
|                               |  |                   |       |                  

---

|* | As of September 30, 2003, current liabilities included a provision for severance pay expenses and termination of contractual obligations in the amount of $340,000 which will be paid
in the forth quarter of 2003.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Profit and loss of
the discontinued operations were as follows:



|                                      |  | Three MonthsendedSeptember 30, |       |      | Nine MonthsendedSeptember 30, |      
|------------------------------------- |  | ------------------------------ | ----- | ---- | ----------------------------- | -----
|                                      |  | 2003                           |       | 2002 |                               |      
|                                      |  | In thousands                   |       |      | In thousands                  |      
|Net revenues                          |  | $                              | 80    |      | $                             | 151  
|Cost of revenues                      |  |                                | 28    |      |                               | 286  
|                                      |  |                                |       |      |                               |      
|Gross profit (loss)                   |  |                                | 52    |      |                               | (135 
|                                      |  |                                |       |      |                               |      
|Loss from operations                  |  |                                | 1,273 |      |                               | 966  
|Interest expenses, net                |  |                                | 3     |      |                               | 37   
|                                      |  |                                |       |      |                               |      
|Net loss from discontinued operations |  | $                              | 1,276 |      | $                             | 1,003
|                                      |  |                                |       |      |                               |      



Loss from discontinued
operations includes:



| | (1) | Amortization of identifiable assets (we amortized the identifiable intangible assets over a period of three years)
| | --- | ------------------------------------------------------------------------------------------------------------------



|                    |  | Three MonthsendedSeptember 30, |     | Nine MonthsendedSeptember 30,
|------------------- |  | ------------------------------ | --- | -----------------------------
|                    |  | 2002                           |     | 2003                         
|                    |  | In thousands                   |     | In thousands                 
|Acquired technology |  | $                              | 229 |                              
|Customers list      |  |                                | 30  |                              
|                    |  |                                |     |                              
|                    |  | $                              | 259 |                              
|                    |  |                                |     |                              



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| | (2) | Severance expenses and termination of contractual obligations as follows:
| | --- | -------------------------------------------------------------------------



|                                         |  | Severanceexpenses |      |   | Termination ofcontractualobligations |   | Total | 
|---------------------------------------- |  | ----------------- | ---- | - | ------------------------------------ | - | ----- | 
|                                         |  | In thousands      |     
|Provision as of June 30, 2003            |  | $                 | 271  |   |                                      | $ |      | 
|Expenses incurred in the period          |  |                   | 181  |   |                                      |   | 146   | 
|                                         |  |                   |      |   |                                      |   |       | 
|Total expenses                           |  |                   | 452  |   |                                      |   | 146   | 
|Incurred expenses paid during the period |  |                   | (258 | ) |                                      |   |       | 
|                                         |  |                   |      |   |                                      |   |       | 
|Balance as of September 30, 2003         |  | $                 | 194  |   |                                      | $ | 146   | 
|                                         |  |                   |      |   |                                      |   |       | 



| | (3) | Due to the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market, we performed an impairment test, based on the valuation
of Shiras operations and its tangible and intangible assets as of June 30, 2003. The impairment test resulted in impairment charges of $2,644,000, out of which $1,831,000 related to the acquired technology, $227,000 related to the customer
list, $420,000 related to the goodwill recorded upon Shiras acquisition and $166,000 related to property and equipment. The impairment charges were based on the fair value of the related assets, which were calculated based on the present value
of the related cash flows.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The changes in the
amount of identifiable intangible assets and in the carrying amount of goodwill for the period of nine months ended September 30, 2003 are as follows:



|                                 |  | Acquiredtechnology |        |   | Customerslist |   |      | Goodwill | 
|-------------------------------- |  | ------------------ | ------ | - | ------------- | - | ---- | -------- | 
|                                 |  | In thousands       |       
|Balance as of January 1, 2003    |  | $                  | 2,287  |   |               | $ | 287  |          | 
|Amortization                     |  |                    | (456   | ) |               |   | (60  | )        | 
|Impairment in June 30, 2003      |  |                    | (1,831 | ) |               |   | (227 | )        | 
|                                 |  |                    |        |   |               |   |      |          | 
|Balance as of September 30, 2003 |  | $                  |       |   |               | $ |     |          | 
|                                 |  |                    |        |   |               |   |      |          | 



Liquidity and Capital Resources



As of September 30, 2003, we had $61.6 million of cash,
cash equivalents and short-term investments. In the first nine months of 2003, net cash used in operations was $10.3 million, comprised of our net loss of $12 million and changes in other working capital accounts of $2.2 million, capital gain of
$1,000, and partially offset by a non-cash charges of $1.1 million for depreciation and amortization, $2.6 million of impairment of identifiable intangible assets, property and equipment and goodwill. In the first nine months of 2002, cash used in
operations was $7.7 million, comprised of our net loss of $5.9 million and changes in other working capital accounts of $3.4 million, and partially offset by non-cash charges of $522,000 for deferred stock compensation charges and $995,000 for
depreciation and amortization.



In the first nine months of
2003, net cash provided by investing activities was $6.2 million, comprised of our proceeds from sales and maturities of short-term investments net of our purchase of short-term investments of $6.5 million, proceeds from sale of property and
equipment amounting to approximately $1,000, and partially offset by an outflow of approximately $277,000 for investments in property and equipment. In the first nine months of 2002, net cash provided by investing activities was $13.6 million,
comprised of our proceeds from sales and maturities of short-term investments net of our purchase of short-term investments of $13.7 million as well as proceeds from sale of property and equipment amounting to approximately $15,000, partially offset
by an outflow of approximately $79,000 for investments in property and equipment and in the purchase of Shira.



Financing activities in the first nine months of 2003 amounted to approximately $163,000 of proceeds from purchases of stock under the employee stock
purchase plan. Financing activities in the first nine months of



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2002 resulted in a net outflow of approximately $1.7 million from a loan to our former Chief Executive Officer and from proceeds from short term debt,
partially offset by proceeds from stock option exercises and purchases of stock under the employee stock purchase plan.



Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing additional international operations and other factors. We expect that our cash and investment balances will be sufficient to meet our working capital and capital expenditure
needs for at least the next 12 months. After that, we may need to raise additional funds for a number of uses. We may not be able to obtain additional funds on acceptable terms, or at all. We expect to devote substantial capital resources to search
for, investigate and, potentially, acquire new businesses, companies or technologies. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.



New Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46
Consolidation of Variable Interest Entities (FIN 46). Under FIN 46 entities are separated into two populations: (1) those for which voting interests are used to determine consolidation (this is the most common situation) and (2) those
for which variable interests are used to determine consolidation. FIN 46 explains how to identify Variable Interest Entities (VIE) and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interests, and
results of activities of a VIE in its consolidated financial statements. FIN 46 is effective as follows: for variable interests in variable interest entities created after January 31, 2003, FIN 46 shall apply immediately, for variable interests in
variable interest entities created before that date, FIN 46 shall apply - for calendar year-end company - as of December 31, 2003. We do not expect the adoption of FIN 46 to have a material effect on our consolidated financial statements.



RISK FACTORS



This Form 10-Q contains forward-looking statements concerning our existing
and future products, markets, expenses, revenues, liquidity, performance and cash needs as well as our plans and strategies. These forward-looking statements involve risks and uncertainties and are based on current management expectations. Many
factors could cause actual results and events to differ significantly from the results anticipated by us and described in these forward looking statements, including but not limited to the following risk factors.



We have a history of losses, expect future losses and may never achieve or sustain
profitability.



We have incurred significant losses since
our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $9.2 million in 2002 and $12 million in the first nine months of 2003. As of September 30, 2003, our accumulated deficit
was approximately $172 million. In response to the significant decline in our business and revenues which began in 2001 and has continued through the present, we have decreased our operating expenses in our wireless business; however, our expenses
will continue to be significantly greater than our gross margin on revenues for the foreseeable future. In addition, we recently increased our sales and marketing expenditures and research and development expenditures in connection with our
increased efforts in China. Our revenues and gross margins may not grow or even continue at their current level and may decline even further. Our gross margins have been favorably affected by sales of inventory that had been previously written off.
If our revenues do not rapidly increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.



Economic weakness has adversely affected, and could continue to affect adversely, our revenue, gross margin and expenses.



Our revenue and gross margin depend significantly on general economic
conditions and the demand for fixed wireless broadband access systems. Weak demand for our products and services caused by ongoing economic weakness over the past several years has resulted, and may result, in decreased revenue, gross margin,
earnings or growth rates and problems with our ability to manage inventory levels and realize customer



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receivables. Economic and market conditions continue to be challenging. As a result, individuals and companies have delayed or reduced expenditures,
including those for technology. In addition, if our customers experience financial difficulties, we could experience increases in bad debt write-offs and additions to reserves in our receivables portfolio, our lessees may be unable to make required
payments. Continued uncertainty about future economic conditions makes it difficult to forecast operating results and to make decisions about future investments. Further delays or reductions in broadband wireless technology spending could have a
material adverse effect on demand for our products and services and consequently our results of operations, prospects and stock price.



If the adoption of broadband wireless technology continues to be limited, we will not be able to sustain our business and may need to shut it down.



Our future success in the telecommunications business depends on high-speed
wireless communications products gaining market acceptance as a means to provide voice and data communications services. Because these markets are relatively new and unproven, it is difficult to predict if these markets will ever develop or expand.
The major service providers in the United States, including WorldCom, which is currently in Chapter 11 reorganization proceedings, and Sprint have ceased, delayed or reduced their rollouts and may further delay or reduce rollouts in the future. In
the event that service providers adopt technologies other than the wireless technologies that we offer or if they delay further their deployment of high-speed wireless communication products, we will not be able to sustain or expand our business and
may be required to cease operations in this business.



If telecommunications
service providers and systems integrators do not promote and purchase our products, or if the telecommunications equipment market continues not to improve and grow, our business will be seriously harmed.



Telecommunications service providers continually evaluate alternative
technologies, including digital subscriber line, fiber and cable. Should service providers or systems integrators, to which we may sell products in the future, cease to emphasize systems that include our products, choose to emphasize alternative
technologies or promote systems of our competitors, our business would be seriously harmed.



In addition, commencing in 2001 and continuing through the first nine months of 2003, the market for telecommunications equipment significantly declined, which severely adversely affected the entire telecommunications
industry, including service providers, systems integrators and equipment providers, and reduced the business outlook and visibility of the industry. In connection with the deterioration of global economic conditions, many of our customers and
potential customers are also currently unable to obtain debt or equity financing for deployment of their wireless access networks and therefore do not currently have adequate capital resources to purchase our products. If the telecommunications
market, and in particular the market for broadband wireless access equipment, does not improve and grow, our business would be substantially harmed.



If the communications and Internet industries do not grow and evolve in a manner favorable to our business strategy or us, our business may be seriously harmed.



Our future success is dependent upon the growth of
the communications industry and, in particular, the Internet. The growth of the global communications and Internet industries has slowed significantly over the past two years. Furthermore, these markets continue to evolve rapidly because of advances
in technology and changes in customer demand. We cannot predict growth rates or future trends in technology development. In addition, the deregulation, privatization and economic globalization of the worldwide communications market, which resulted
in increased competition and escalating demand for new technologies and services, may not continue in a manner favorable to us or our business strategies. In addition, the growth in demand for Internet services and the resulting need for high-speed
or enhanced communications products may not continue at its current rate or at all.





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Because we operate in international markets, and particularly in China, we are exposed to additional risks which could
cause our international sales to decline and our foreign operations to suffer.



Sales outside of North America accounted for approximately 80% of our revenues in the first nine months of 2003 and 34% of our revenues in 2002. Sales to China accounted for approximately 92% of our revenues
outside of North America in the first nine months of 2003 and approximately 73% of our sales outside of North America in 2002. We expect that international sales, and in particular sales to China, will account for a substantial portion of our
revenues in future periods. In addition, we maintain research and development facilities in Israel. Our reliance on international sales, operations and suppliers exposes us to foreign political and economic risks, which may impair our ability to
generate revenues. These risks include:



| |  | economic and political instability;
| | - | -----------------------------------



| |  | terrorist acts, international conflicts and acts of war;
| | - | --------------------------------------------------------



| |  | our international customers ability to obtain financing to fund their deployments;
| | - | -----------------------------------------------------------------------------------



| |  | changes in regulatory requirements and licensing frequencies to service providers;
| | - | ----------------------------------------------------------------------------------



| |  | import or export licensing requirements and tariffs;
| | - | ----------------------------------------------------



| |  | labor shortages or stoppages;
| | - | -----------------------------



| |  | trade restrictions and tax policies; and
| | - | ----------------------------------------



| |  | limited protection of intellectual property rights.
| | - | ---------------------------------------------------



Any of the foregoing difficulties of conducting business internationally could seriously harm our business.



Terrorist acts, international conflicts and acts of war may seriously harm our business and revenue, costs and expenses and financial
condition and stock price.



Terrorist acts or acts of war
(wherever located around the world) may cause damage or disruption to the Company, our employees, facilities, partners, suppliers, distributors or customers, which could significantly impact our revenue, costs and expenses and financial condition.
The terrorist attacks that took place in the United States on September 11, 2001 and subsequent terrorist attacks in other countries have created many economic and political uncertainties, some of which may materially harm our business and results
of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other actual or potential conflicts or acts of war, including the ongoing
military operations in Afghanistan and Iraq as well as the threat of conflict with North Korea, have created many economic and political uncertainties that could adversely affect our business, results of operations and stock price in ways that we
cannot presently predict. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war. Any political, economic or other instability in the United States, Taiwan, China or Israel in particular could adversely
affect our suppliers and our business.



Our sales and operations in China
could be disrupted if SARS continues to spread.



The spread
of Severe Acute Respiratory Syndrome (SARS) in China, and in particular in Beijing, recently disrupted commerce in China and caused a severe disruption of businesses in Beijing. In addition, both internal and international flights into
and out of Beijing were reduced. Although SARS appears to have been contained, if SARS re-emerges and spreads in Beijing and China, the markets for our products there may be adversely affected. In addition, we will likely restrict the travel of our
sales and technical personnel to China if SARS is not contained, which could adversely affect our ability to market and sell our products in China and provide technical assistance to our customers in China. In addition, a restriction of flights in
China could disrupt shipments of our products into China and delay or curtail sales of our products. If SARS spreads beyond China, other world markets for our products may also be adversely affected.



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Since we have significantly reduced our workforce and expenses, we may not be able to address successfully the
telecommunications market if and when it recovers.



During
2001, the global telecommunications market, and in particular the fixed wireless broadband access market, experienced a significant downturn. We experienced dramatic decreases in the sales of our products and the adoption of our technology in 2001,
and our sales have continued at a reduced level through the first nine months of 2003. In this environment, we determined in 2001 that significant expenditures in our historical products and technology were not justified, and we reduced our
workforce by approximately 75%, from 240 employees to 60 employees. During 2002 and the first quarter of 2003, our workforce in the wireless broadband access business further declined by seven employees, to 53 employees at March 31, 2003. In the
second and third quarters of 2003, we increased our sales and marketing expenses and research and development expenses in connection with our increased efforts in China, although such expenses continue to be at low levels. While we expect that the
telecommunications market may recover over time, any such recovery may occur only slowly. If the market does not recover in the near future and if our sales do not substantially increase from current levels, we will continue to incur losses and may
never achieve profitability. We may be unable effectively to sell and market our products without substantially further increasing sales and marketing expenses. Furthermore, substantial uncertainty exists as to the ability of our existing products
and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively address customer needs in the telecommunications market as it evolves with new and competitive products and technologies may
be limited due to, among other things, our limited research and development budget.



The loss of one or more of our key customers would result in a loss of a significant amount of our revenues and adversely affect our business.



A relatively small number of customers account for a large percentage of our revenues, as set forth in the table below.



|              |  | Three Months endedSeptember 30, |   |  | Nine Months endedSeptember 30, |  
|------------- |  | ------------------------------- | - |  | ------------------------------ | -
|              |  | 2003                            |   |  | 2002                           |  
|Net revenues: |  |                                 |   |  |                                |  
|              |  |                                 |   | 
|Customer A    |  | 53                              | % |  | 11                             | %
|              |  |                                 |   | 
|Customer B    |  | 22                              | % |  |                                |  
|              |  |                                 |   | 
|Customer C    |  | 10                              | % |  | 37                             | %
|              |  |                                 |   | 
|Customer D    |  | 9                               | % |  | 24                             | %
|              |  |                                 |   | 
|Customer E    |  |                                 |   |  | 15                             | %



We expect that we will
continue to depend on a limited number of customers for a substantial portion of our revenues in future periods. The loss of a major customer could seriously harm our ability to sustain revenue levels, which would seriously harm our operating
results. In addition, many of our customers are dependent on obtaining funding for their deployments. The continued inability of our customers to obtain such funding will adversely affect their deployments, which would adversely affect our business.



We may not be able to sell Shira on acceptable terms, or at all.



In August 2003, the Board of Directors determined to cease
substantially all of Shiras business operations and terminate substantially all of Shiras employees. On August 14, 2003, Shiras remaining employees were terminated. In addition, Vyyo is exploring the sale of Shiras operations
and assets to Shiras former management; however, if it is unable to negotiate a sale on acceptable terms, Vyyo expects to complete the winding down of Shira within the next three months. Vyyo made this decision due to the continuing decline in
Shiras sales, Shiras recurring losses and its inability to penetrate the market. Vyyo would likely receive only minimal value, if any, in a sale of Shira.



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Conditions in Israel affect our operations and may limit our ability to produce and sell our systems.



Our research and development, final testing and assembly
facilities, and some contract manufacturers are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Hostilities within Israel have dramatically escalated in recent years, which could disrupt
our operations. In addition, the recent United States war against Iraq and the current military and political presence of the United States or its allies in Iraq could cause increasing instability in the Middle East and further disrupt relations
between Israel and its Arab neighbors. We could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation, or a significant
downturn in the economic or financial condition of Israel. As a result of the hostilities and unrest presently occurring within Israel and the Middle East, the future of the peace efforts between Israel and its Arab neighbors is uncertain. Moreover,
several countries still restrict business with Israel and with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel or Israeli businesses.



Our Chief Financial Officer, one of our directors and many of our employees
are based in Israel, and many of them are currently obligated to perform annual reserve duty and are subject to being called to active duty at any time under emergency circumstances. Our business cannot assess the full impact of these requirements
on our workforce or business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.



Because substantially all of our revenues are generated in U.S. dollars while a portion of our expenses are incurred in New Israeli shekels, our results of operations
may be seriously harmed if the rate of inflation in Israel exceeds the rate of devaluation of the New Israeli shekel against the U.S. dollar.



We generate substantially all of our revenues in U.S. dollars, but we incur a substantial portion of our expenses, principally salaries and related
personnel expenses related to research and development, in New Israeli shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the
timing of this devaluation lags behind inflation in Israel. If the dollar costs of our operations in Israel increase, our dollar-measured results of operations will be seriously harmed.



Because we do not have long-term contracts with our customers, our customers can
discontinue purchases of our systems at any time, which could adversely affect future revenues and operating results.



We sell our wireless broadband access systems based on individual purchase orders. Our customers are generally not obligated by long-term
agreements to purchase our systems, and the agreements we have entered into do not obligate our customers to purchase a minimum number of systems. Our customers can generally cancel or reschedule orders on short notice and discontinue using our
systems at any time. Further, having a successful field system trial does not necessarily mean that the customer will order large volumes of our systems. The reduction, delay or cancellation of orders from one or more of our customers could
seriously harm our operating results.



If we determine to pursue
alternatives to our traditional wireless business, we may not be successful in effecting any such transactions on favorable terms, or at all, which could adversely affect our future prospects.



While we are continuing to operate our traditional wireless business and have
increased our sales and marketing efforts in the China market, sales in other markets have not significantly increased and may not increase in the foreseeable future; therefore, we are also considering a variety of alternatives to this business,
including the sale, divestiture, license or restructuring of a substantial portion or all of our fixed broadband wireless access technology or assets. In the event of any such transaction, the value we may realize in the current market could be
minimal. In addition to our acquisition of Shira in 2002, we also continue to explore alternatives relating to the licensing, purchase or acquisition of other products, technology, assets or businesses. We have invested, and we expect that we will
continue to invest, significant time and resources searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.



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We may not be able to successfully operate or integrate businesses that we may choose to acquire, in a cost-effective
and non-disruptive manner and realize anticipated benefits.



We continue to explore investments in or acquisitions of other companies, products or technologies, including companies or technologies that are not complementary or related to our current wireless broadband access business. We may be
unsuccessful in operating such other businesses profitably, just as we were unsuccessful in operating Shira as a successful business. In addition, we may have difficulty integrating other companies personnel, operations, products and
technologies into our current business. These difficulties may disrupt our ongoing business, divert the time and attention of our management and employees and increase our expenses. Moreover, the anticipated benefits of any acquisition may not be
realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other identifiable intangible assets and the incurrence of large
and immediate write-offs, any of which could seriously harm our business. In addition, we expect that we will expend significant resources in searching for and investigating new business opportunities and may be unsuccessful in acquiring new
businesses.



The potential effects of regulatory actions could impact
spectrum allocation and frequencies worldwide and cause delays or otherwise negatively impact the growth and development of the broadband wireless market, which would adversely affect our business.



Countries worldwide are considering or are in the process of allocating
frequencies for fixed wireless applications, but not all markets have done so. In addition, in October 2001, the United States Federal Communications Commission indicated that existing MMDS license holders may be able in the future to deploy mobile
services using the MMDS frequencies. If service providers in the United States will use mobile technology such as 3G cellular technology in the MMDS band, it will harm our business because Vyyos current technology does not support mobile
services. If the United States and/or other countries do not provide sufficient spectrum for fixed wireless applications or reallocate spectrum in the fixed wireless frequency bands for other purposes, our customers may delay or cancel deployments
in fixed broadband wireless, which could seriously harm our business. Internationally, there has been delay in the allocation of 3.5Ghz licenses, although China has recently begun issuing operating licenses for fixed wireless in the 3.5Ghz band to
service providers in a number of provinces. Any further delays will adversely affect our customers deployments and could significantly harm our business.



Our quarterly operating results fluctuate, which may cause our share price to decline.



Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future.
These variations result from a number of factors, including:



| |  | the uncertain timing and level of market acceptance for our systems and the uncertain timing and extent of rollouts of wireless broadband access systems by the major service
providers;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the ability of our existing and potential direct customers to obtain financing for the deployment of broadband wireless access systems;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | the mix of products sold by us and the mix of sales channels through which they are sold;
| | - | -----------------------------------------------------------------------------------------



| |  | reductions in pricing by us or our competitors;
| | - | -----------------------------------------------



| |  | global economic conditions;
| | - | ---------------------------



| |  | the effectiveness of our system integrator customers in marketing and selling their network systems equipment;
| | - | --------------------------------------------------------------------------------------------------------------



| |  | changes in the prices or delays in deliveries of the components we purchase or license; and
| | - | -------------------------------------------------------------------------------------------



| |  | any acquisitions or dispositions we may effect.
| | - | -----------------------------------------------



A delay in the recognition of revenue, even from one customer, may have a significant negative impact on our results of operations for a given period.
Also, because only a small portion of our expenses vary with our revenues, if revenue levels for a quarter fall below our expectations, we will not be able to timely adjust expenses accordingly, which would harm our operating results in that period.
We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. If our operating results fall below the expectations of investors in future periods, our
share price will likely decline.



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Competition may result in lower average selling prices, and we may be unable to reduce our costs at offsetting rates,
which may impair our ability to achieve profitability.



We
expect that price competition among broadband wireless access systems suppliers will reduce our gross margins in the future. We anticipate that the average selling prices of broadband wireless access systems will continue to decline as product
technologies mature. We may be unable to reduce our manufacturing costs in response to declining average per unit selling prices. Our competitors may be able to achieve greater economies of scale and may be less vulnerable to the effects of price
competition than we are. These declines in average selling prices will generally lead to declines in gross margins and total profitability for these systems. If we are unable to reduce our costs to offset declines in average selling prices, we may
not be able to achieve or maintain profitability.



Competition may decrease
our market share, net revenues and gross margins, which may cause our stock price to decline.



The market for broadband access systems is intensely competitive, rapidly evolving and subject to rapid technological change. Certain of our competitors
and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than we have and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other
developments. In addition, many of our competitors have longer operating histories, greater name recognition and established relationships with system integrators and service providers. Our primary competitors are Alvarion Inc., Wi-LAN Inc., Netro
Corporation, Harris Corporation, REMEC, Inc. and ZTE Corporation. Most of these competitors have existing relationships with one or more of our prospective customers, and many of these companies are operating and increasing their presence in the
China market, on which we believe a substantial portion our business will depend. We also face competition from technologies such as digital subscriber line, fiber and cable. We may not be able to compete successfully against our current and future
competitors, and competitive pressures may seriously harm our business.



Undetected hardware defects or software errors may increase our costs and impair the market acceptance of our systems, which would adversely affect our future operating results.



Our systems may contain undetected defects or errors. This may result either
from defects in components supplied by third parties or from errors or defects in our software or hardware that we have failed to detect. We have in the past experienced, and may experience from time to time in the future, defects in new or enhanced
products and systems after commencement of commercial shipments, or defects in deployed systems. Our customers integrate our systems into their networks with components from other vendors. Accordingly, when problems occur in a network system, it may
be difficult to identify the component that caused the problem. Regardless of the source of these defects or errors, we will need to divert the attention of our engineering personnel from our product development efforts to address the defect or
error. We have incurred in the past and may again incur significant warranty and repair costs related to defects or errors, and we may also be subject to liability claims for damages related to these defects or errors. The occurrence of defects or
errors, whether caused by our systems or the components of another vendor, may result in significant customer relationship problems and injury to our reputation and may impair the market acceptance of our systems.



We depend on contract manufacturers and third party equipment and technology suppliers,
and these manufacturers and suppliers may be unable to fill our orders or develop required technology on a timely basis, which would result in delays that could seriously harm our results of operations.



We currently have relationships with a limited number of contract
manufacturers for the manufacturing of our fixed broadband wireless systems, which contractors are located in Israel, Taiwan and China. These relationships may be terminated by either party with little or no notice. If our manufacturers are unable
or unwilling to continue manufacturing our systems in required volumes, we would have to identify qualified alternative manufacturers, which would result in delays that could cause our results of operations to suffer. Our limited experience with
these manufacturers does not provide us with a reliable basis on which to project their ability to meet delivery schedules, yield targets or costs. If we are required to find alternative manufacturing



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sources, we may not be able to satisfy our production requirements at acceptable prices and on a timely basis, if at all. Any significant interruption in
supply would affect the allocation of systems to customers, which in turn could seriously harm our business. In addition, we currently have no formal agreement or relationship with a manufacturer for our modem products. Our current inventory of
modems will likely be insufficient to fulfill anticipated demand, and we will therefore be required to find a manufacturer in the near future. Our inability to identify and enter into a relationship with a manufacturer for our modems would harm our
business.



In addition to sales to system integrators, we also
sell in some instances directly to service providers. Such direct sales require us to resell to service providers equipment manufactured by third party suppliers and to integrate this equipment with the equipment we manufacture. We are particularly
dependent on third party radio suppliers in selling our 3.5 Ghz and other products. We currently have no formal relationship with any third party supplier. If we are unable to establish relationships with suppliers, or if these suppliers are unable
to provide equipment that meets the specifications of our customers on the delivery schedules required by our customers, and at acceptable prices, our business would be substantially harmed.



We obtain some of the components included in our systems from a single source or a limited
group of suppliers, and the loss of any of these suppliers could cause production delays and a substantial loss of revenue.



We currently obtain key components from a limited number of suppliers. Some of these components, such as semiconductor components for our wireless hubs,
are obtained from a single source supplier. We generally do not have long-term supply contracts with our suppliers. These factors present us with the following risks:



| |  | delays in delivery or shortages in components could interrupt and delay manufacturing and result in cancellation of orders for our systems;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | suppliers could increase component prices significantly and with immediate effect;
| | - | ----------------------------------------------------------------------------------



| |  | we may not be able to develop alternative sources for system components, if or as required in the future;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | suppliers could discontinue the manufacture or supply of components used in our systems. In such event, we might need to modify our systems, which may cause delays in shipments,
increased manufacturing costs and increased systems prices; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we may hold more inventory than is immediately required to compensate for potential component shortages or discontinuation.
| | - | ---------------------------------------------------------------------------------------------------------------------------



The occurrence of any of these or similar events would harm our business.



If we do not develop new systems and system features in response to customer requirements
or in a timely way, customers may not buy our products, which would seriously harm our business.



The broadband wireless access industry is rapidly evolving and subject to technological change and innovation. We may experience design or manufacturing
difficulties that could delay or prevent our development, introduction or marketing of new systems and enhancements, any of which could cause us to incur unexpected expenses or lose revenues. If we are unable to comply with diverse, new or varying
governmental regulations or industry standards in each of the many worldwide markets in which we compete, we may not be able to respond to customers in a timely manner, which would harm our business.



If we do not effectively manage our costs in response to the decline in the business
outlook, our business could be substantially harmed.



Although we reduced the costs of our fixed broadband wireless operations in response to the decline in our business outlook, we have recently increased certain expenses to address the market opportunity in China, and we will need to
continue to monitor closely our costs and expenses. If the market and our business does not expand, we may need to reduce further our operations.



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We depend on our key personnel, in particular Davidi Gilo, our Chairman of the Board and Chief Executive Officer, and
Menashe Shahar, our Chief Technical Officer, the loss of either of whom could seriously harm our business.



Our future success depends in large part on the continued services of our senior management and key personnel. In particular, we are highly dependent on
the service of Davidi Gilo, our Chairman of the Board and Chief Executive Officer, and Menashe Shahar, our Chief Technical Officer. We do not carry key person life insurance on our senior management or key personnel. Any loss of the services of
Davidi Gilo or Menashe Shahar, other members of senior management or other key personnel could seriously harm our business.



Delays and shortages in the supply of components from our suppliers and third party vendors could reduce our revenues or increase our cost of revenue.



Delays and shortages in the supply of components are typical in our
industry. We have experienced minor delays and shortages on more than one occasion in the past. In addition, any failure of necessary worldwide manufacturing capacity to rise along with a rise in demand could result in our subcontract manufacturers
allocating available capacity to larger customers or to customers that have long-term supply contracts in place. Our inability to obtain adequate manufacturing capacity at acceptable prices, or any delay or interruption in supply, could reduce our
revenues or increase our cost of revenue and could seriously harm our business.



Third parties may bring infringement claims against us that could harm our ability to sell our products and result in substantial liabilities.



We expect that we may be subject to license offers and infringement claims from time to time. In this regard, in early 1999, and again in April 2000,
we received written notices from Hybrid Networks in which Hybrid claimed to have patent rights in certain technology. Hybrid requested that we review our products in light of 11 of Hybrids issued patents. Hybrids assets were acquired by
ioWave, Inc. in 2002.



Third parties, including ioWave Inc. as
Hybrids successor, could assert, and it could be found, that our technologies infringe their proprietary rights. We could incur substantial costs to defend any litigation, and intellectual property litigation could force us to do one or more
of the following:



| |  | obtain licenses to the infringing technology;
| | - | ---------------------------------------------



| |  | pay substantial damages under applicable law;
| | - | ---------------------------------------------



| |  | cease the manufacture, use and sale of infringing products; or
| | - | --------------------------------------------------------------



| |  | expend significant resources to develop non-infringing technology.
| | - | ------------------------------------------------------------------



We also may experience infringement claims based on Shiras technology and products. Accordingly, any infringement claim or litigation against us could significantly
harm our business, operating results and financial condition.



If we fail to
adequately protect our intellectual property, we may not be able to compete.



Our success depends in part on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions
to establish and protect our proprietary rights. Our pending or future patent applications may not be approved and the claims covered by such applications may be reduced. If allowed, our patents may not be of sufficient scope or strength, and others
may independently develop similar technologies or products. Litigation, which could result in substantial costs and diversion of our efforts, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and
validity of third-party proprietary rights. Any such litigation, regardless of the outcome, could be expensive and time consuming, and adverse determinations in any such litigation could seriously harm our business.



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Similarly, our pending or future trademark applications may not be approved and may not be sufficient to
protect our trademarks in the markets where we either do business or hope to conduct business. The inability to secure any necessary trademark rights could be costly and could seriously harm our business.



We regularly evaluate and seek to explore and develop derivative products
relating to our fixed broadband wireless systems. We may not be able to secure all desired intellectual property protection relating to such derivative products. Furthermore, because of the rapid pace of change in the broadband wireless industry,
much of our business and many of our products rely on technologies that evolve constantly and this continuing uncertainty make it difficult to forecast future demand for our products.



Because of our long product development process and sales cycle, we may incur substantial expenses without anticipated revenues that
could cause our operating results to fluctuate.



A
customers decision to purchase our fixed broadband wireless systems typically involves a significant technical evaluation, formal internal procedures associated with capital expenditure approvals and testing and acceptance of new systems that
affect key operations. For these and other reasons, the sales cycle associated with our systems can be lengthy and subject to a number of significant risks, over which we have little or no control. Because of the growing sales cycle and the
likelihood that we may rely on a small number of customers for our revenues, our operating results could be seriously harmed if such revenues do not materialize when anticipated, or at all.



We may need to raise additional capital in the future, and if we are unable to secure
adequate funds on terms acceptable to us, we may not be able to execute our business plan.



We expect that the net proceeds from our initial public offering completed in May 2000, and our secondary public offering completed in September 2000, will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to raise additional funds for a number of uses, including:



| |  | acquiring technologies or businesses;
| | - | -------------------------------------



| |  | hiring additional qualified personnel; and
| | - | ------------------------------------------



| |  | implementing further marketing and sales activities.
| | - | ----------------------------------------------------



We may have to raise funds even sooner in order to fund more rapid expansion, to respond to competitive pressures or to otherwise respond to unanticipated
requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced. We may not be able to obtain additional funds on acceptable terms, or at
all. If we cannot raise needed funds on acceptable terms, we may not be able to increase our ongoing operations if necessary, take advantage of acquisition opportunities, develop or enhance systems or respond to competitive pressures. This potential
inability to raise funds on acceptable terms could seriously harm our business.



Government regulation and industry standards may increase our costs of doing business, limit our potential markets or require changes to our business model and adversely affect our business.



The emergence or evolution of regulations and industry standards for
broadband wireless products, through official standards committees or widespread use by operators, could require us to modify our systems, which may be expensive and time-consuming, and to incur substantial compliance costs. Radio frequencies are
subject to extensive regulation under the laws of the United States, foreign laws and international treaties. Each country has different regulations and regulatory processes for wireless communications equipment and uses of radio frequencies.
Failure by the regulatory authorities to allocate suitable, sufficient radio frequencies to potential customers in a timely manner could result in the delay or loss of potential orders for our systems and seriously harm our business.





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We are subject to export control laws and regulations with respect to certain 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, which would result in additional compliance burdens and could impair the
enforceability of our contract rights. We may not be able to renew our export licenses as necessary from time to time. In addition, we may be required to apply for additional licenses to cover modifications and enhancements to our products. Any
revocation or expiration of any requisite license, the failure to obtain a license for product modifications and enhancements, or more stringent export control requirements could seriously harm our business.



The government programs and benefits we receive require us to satisfy prescribed
conditions. These programs and benefits may be terminated or reduced in the future, which would increase our costs and taxes and could seriously harm our business.



Several of our capital investments have been granted approved enterprise status under Israeli law providing us
with certain Israeli tax benefits. The benefits available to an approved enterprise are conditioned upon the fulfillment of conditions stipulated in applicable law and in the specific certificate of approval. If we fail to comply with these
conditions, in whole or in part, we may be required to pay additional taxes for the period in which we enjoyed the tax benefits and would likely be denied these benefits in the future. From time to time, the government of Israel has considered
reducing or eliminating the benefits available under the approved enterprise program. These tax benefits may not be continued in the future at their current levels or at all. The termination or reduction of these benefits would increase our taxes
and could seriously harm our business. As of the date hereof, our Israeli subsidiaries have accumulated loss carry-forwards for Israeli tax purposes and therefore have not enjoyed any tax benefits under current approved enterprise programs.



In the past, we received grants from the government of Israel
for the financing of a portion of our research and development expenditures for previous products in Israel. The regulations under which we received these grants restrict our ability to manufacture products or transfer technology outside of Israel
for products developed with this technology. Furthermore, these grants may not be available to us in the future.



Several of our directors and officers have relationships with Davidi Gilo and his affiliated companies that could be deemed to limit their independence.



Several members of our board of directors, Lewis Broad,
Neill Brownstein, Avraham Fischer, Samuel Kaplan and Alan Zimmerman, and our President and Chief Operating Officer, Michael Corwin, have had professional relationships with our Chairman of the Board, Davidi Gilo, and his affiliated companies for
several years. These members of our board of directors previously served on the boards of directors of DSP Communications, Inc. and/or DSP Group, Inc., of which Mr. Gilo was formerly the controlling stockholder and the Chairman of the Board, and Mr.
Corwin previously served as an officer of DSP Group. In addition, Avraham Fischer is a senior partner of the law firm of Fischer, Behar, Chen & Co., which represents us on matters relating to Israeli law, and is an investor and co-Chief
Executive Officer of an Israeli investor group in which Mr. Gilo is also an investor. There are no family relationships between these directors and officers, and no member of our compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. However, the long-term relationships between these directors and officers and Mr. Gilo and his
affiliated companies could be deemed to limit their independence.



Because
our management has the ability to control stockholder votes, the premium over market price that an acquirer might otherwise pay may be reduced and any merger or takeover may be delayed.



Our management collectively own approximately 45% of our outstanding common
stock. As a result, these stockholders, acting together, will be able to control the outcome of all matters submitted for stockholder action, including:



| |  | electing members to our board of directors;
| | - | -------------------------------------------



| |  | approving significant change-in-control transactions;
| | - | -----------------------------------------------------



| |  | determining the amount and timing of dividends paid to themselves and to our public stockholders; and
| | - | -----------------------------------------------------------------------------------------------------



| |  | controlling our management and operations.
| | - | ------------------------------------------



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This concentration of ownership may have the effect of impeding a merger, consolidation, takeover or
other business consolidation involving us, or discouraging a potential acquirer from making a tender offer for our shares. This concentration of ownership could also negatively affect our stocks market price or decrease any premium over market
price that an acquirer might otherwise pay.



Because the Nasdaq National
Market is likely to continue to experience extreme price and volume fluctuations, the price of our stock may decline.



The market price of our shares has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous
factors, including the following:



| |  | actual or anticipated variations in our quarterly operating results or those of our competitors;
| | - | ------------------------------------------------------------------------------------------------



| |  | announcements by us or our competitors of new products or technological innovations;
| | - | ------------------------------------------------------------------------------------



| |  | introduction and adoption of new industry standards;
| | - | ----------------------------------------------------



| |  | changes in financial estimates or recommendations by securities analysts;
| | - | -------------------------------------------------------------------------



| |  | changes in the market valuations of our competitors;
| | - | ----------------------------------------------------



| |  | announcements by us or our competitors of significant acquisitions or partnerships; and
| | - | ---------------------------------------------------------------------------------------



| |  | sales of our common stock.
| | - | --------------------------



Many of these factors are beyond our control and may negatively impact the market price of our common stock, regardless of our performance. In addition,
the stock market in general, and the market for technology and telecommunications-related companies in particular, have been highly volatile. Our common stock may not trade at the same levels of shares as that of other technology companies and
shares of technology companies, in general, may not sustain their current market prices. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities.
We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert managements attention and resources, which could seriously harm our business and operating results.



If our stock price falls below $1.00 per share, our common stock may be delisted from the
Nasdaq National Market.



In order for our common stock to
continue to be quoted on the Nasdaq National Market, we must satisfy various listing maintenance standards established by Nasdaq, including the requirement that our common stock maintain a minimum bid price of at least $1.00 per share. Under
Nasdaqs listing maintenance standards, if the closing bid price of our common stock remains below $1.00 per share for 30 consecutive trading days, Nasdaq will issue a deficiency notice to Vyyo. If the closing bid price subsequently does not
reach $1.00 per share or higher for a minimum of ten consecutive trading days during the 90 calendar days following the issuance of the deficiency notice from Nasdaq, Nasdaq may de-list our common stock from trading on the Nasdaq National Market.
During the third quarter of 2002, our stock price had a closing bid price below $1.00 for over 30 consecutive trading days, although the price has since increased to over $1.00 as a result of the 1-for-3 reverse stock split effected by Vyyo in
August 2002. Vyyo cannot predict whether the market price for our common stock will remain above $1.00. A delisting may negatively impact the value of the stock, since stocks trading on the over-the-counter market are typically less liquid and trade
with larger variations between the bid and ask price.





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Provisions of our governing documents and Delaware law could discourage acquisition proposals or delay a change in
control.



Our amended and restated certificate of
incorporation and bylaws contain anti-takeover provisions that could make it more difficult for a third party to acquire control of us, even if that change in control would be beneficial to stockholders. Specifically:



| |  | our board of directors has the authority to issue common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without
stockholder approval;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our board of directors is divided into three classes, each serving three-year terms;
| | - | ------------------------------------------------------------------------------------



| |  | super-majority voting is required to amend key provisions of our certificate of incorporation and bylaws;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | there are limitations on who can call special meetings of stockholders;
| | - | -----------------------------------------------------------------------



| |  | stockholders are not able to take action by written consent; and
| | - | ----------------------------------------------------------------



| |  | advance notice is required for nominations of directors and for stockholder proposals.
| | - | --------------------------------------------------------------------------------------



In addition, provisions of Delaware law and our stock option plans may also discourage, delay or prevent a change of control
or unsolicited acquisition proposals.



It may be difficult to enforce a U.S.
judgment against us and our nonresident Chief Financial Officer, director and experts.



Our Chief Financial Officer, one of our directors, and some of the experts named in this report are nonresidents 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 enforce a judgment obtained in the United States based upon the civil or criminal liabilities provisions of the United States federal securities laws against us or any of those
persons or to effect service of process upon these persons in the United States.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



We are exposed to financial market risks including changes in interest rates and foreign currency exchange rates. Substantially all of our revenue and capital spending is transacted in U.S. dollars, although a
substantial portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, is incurred in New Israeli shekels, or NIS. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may
arise from changes in foreign exchange rates. In the event of an increase in inflation rates in Israel, or if appreciation of the NIS occurs without a corresponding adjustment in our dollar-denominated revenues, our results of operation and business
could be materially harmed.



As of September 30, 2003, we had
cash, cash equivalents and short-term investments of $61.6 million. Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds that invest in corporate and government fixed income
securities that are subject to interest rate risk. We place our investments with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.



Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and
credit risk. Highly liquid investments with maturity of less than three months at the date of purchase are considered to be cash equivalents; investments with maturities of three months or greater are classified as available-for-sale and considered
to be short-term investments.



While all our cash equivalents
and short-term investments are classified as available-for-sale, we generally have the ability to hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. We may not be able to obtain similar rates after maturity as a result of fluctuating interest rates. We do not hedge any interest rate
exposures.



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Quantitative Interest Rate Disclosure As of September 30, 2003



If market interest rates were to increase on September 30, 2003 immediately
and uniformly by 10%, the fair value of the portfolio would decline by approximately $43,000 or approximately 0.08% of the total portfolio (approximately 0.07% of total assets). Assuming that the average yield to maturity on our portfolio at
September 30, 2003 remains constant throughout the fourth quarter of 2003 and assuming that our cash, cash equivalents and short-term investments balances at September 30, 2003 remain constant for the duration of the fourth quarter of 2003, interest
income for the fourth quarter of 2003 would be approximately $669,000. Assuming a decline of 10% in the market interest rates at September 30, 2003, interest income for the fourth quarter of 2003 would be approximately $667,000, which represents a
decrease in interest income of approximately $2,000. The decrease in interest income will result in a decrease of the same amount to net income and cash flows from operating activities for the three months ended September 30, 2003. These amounts are
determined by considering the impact of the hypothetical interest rates on our cash equivalents and available-for-sale securities at September 30, 2003, over the remaining contractual lives.



Item 4. Controls and Procedures



(a) Disclosure Controls and Procedures. Vyyos management, with the participation of Vyyos Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Vyyos disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, Vyyos Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such period, Vyyos disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by Vyyo in the reports it files or submits under the Exchange Act.



(b) Internal Control Over Financial Reporting. There have not been any changes in Vyyos internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Vyyos internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



None.



Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



On May 2, 2000, we completed an initial public offering of shares of our common stock, $0.0001 par value. The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a
Registration Statement on Form S-1 (No. 333-96129). The Registration Statement was declared effective by the Securities and Exchange Commission on April 3, 2000. The initial public offering price was $40.50 per share for an aggregate initial public
offering of $104.8 million. After deducting the underwriting discounts and commissions of $7.3 million and the offering expenses of approximately $2.6 million, the net proceeds to us from the offering were approximately $94.9 million.



From April 3, 2000, until September 30, 2003, we used approximately $6.7
million of the net offering proceeds for purchases of property, plant and equipment, approximately $2.4 million of the net proceeds for repayment of short term debt obligations, approximately $11.4 million of the net proceeds for repurchase of our
common stock, and approximately $64.1 million of the net offering proceeds for working capital.



On September 19, 2000, we completed an underwritten public offering of our common stock. The shares of common stock sold in the offering were registered
under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-45132). The Registration Statement was declared effective by the Commission on September 13, 2000. The public offering price was $94.688 per share for an aggregate
public offering price of the shares we sold of $55.2 million. After deducting the underwriting discounts and commissions of $2.9 million and the offering expenses of approximately $1.0 million, the net proceeds to us from the offering were
approximately $51.3 million.



From September 13, 2000, until
September 30, 2003, we used none of the net proceeds from this offering. Our temporary investments of the net proceeds from both of the offerings have been in cash, cash equivalents and investment grade, short-term interest bearing securities.



Item 3. DEFAULTS UPON SENIOR SECURITIES



None.



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



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Item 5. OTHER INFORMATION



The
Company has entered into a Sublease Agreement with Tibco Software, Inc. commencing on or around November 1, 2003 for the lease of approximately 14,565 square feet of commercial office space in Palo Alto, California for the Companys principal
place of business (the Lease). Consummation of the Lease remains subject to the final approval of the master landlord and the ground lessor. The scheduled term of the Lease is sixty-six (66) months from commencement.



Item 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) | Exhibits
|--- | --------



| | 10.1 | Sublease Agreement by and between Tibco Software, Inc. and the Company
| | ---- | ----------------------------------------------------------------------



| | 31.1 | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
| | ---- | -------------------------------------------------------------------------------------------------------------------------



| | 31.2 | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
| | ---- | -------------------------------------------------------------------------------------------------------------------------



| | 32.1 | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Reports on Form 8-K.
|--- | --------------------



On August 14, 2003, Vyyo filed a report on Form 8-K furnishing under Item 7 of Form 8-K, and pursuant to Item 12 of Form 8-K, its financial results for
the quarter ended June 30, 2003.



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|Date:     |  | October 30, 2003                                         
|--------- |  | ---------------------------------------------------------
|         
|VYYO INC.
|          | 
|By:       |  | /s/ Davidi Gilo                                          
|          |  | Davidi Gilo, Chief Executive Officer                     
|          |  | (Duly Authorized Officer)                                
|          | 
|By:       |  | /s/ Arik Levi                                            
|          |  | Arik Levi, Chief Financial Officer                       
|          |  | (Duly Authorized Officer and Principal Financial Officer)



39