**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

**(Mark One)**

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

** **

**For the Quarterly Period Ended March 31, 2007**

** **

**or**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the transition period from             to            **

** **

**Commission File Number000-30189**

 

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**VYYO INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                              |   | **94-3241270**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
|                                      |   |                    |
| **6625  The Corners Parkway, Suite 100**  |   | ** **              |
| **Norcross,  Georgia**                    |   | **30092**               |
| (Address of  Principal Executive Offices) |   | (Zip Code)              |

 

Registrant’s telephone number, including area code **(678) 282-8000**

 

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 forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.  Yes x   No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (Check one):

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o   No x

Asof May 11, 2007, there were 18,477,190 shares of Common Stock outstanding.

 

 

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**INDEX**

**VYYO INC.**
|                                                                                                                         | ** ** | **Page No.** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| PART  I. FINANCIAL INFORMATION                                                                                          |       |              |       |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 1. Condensed Consolidated Financial  Statements                                                               |       |              |       |   |   |
|                                                                                                                    |       |              |       |   |   |
| Condensed  Consolidated Balance Sheets at March 31, 2007 and December 31, 2006                                     |       |              | 3          |   |   |
|                                                                                                                    |       |              |       |   |   |
| Condensed Consolidated Statements of Operations for  the Three Months Ended March 31, 2007 and March 31, 2006 |       |              | 4          |   |   |
|                                                                                                                    |       |              |       |   |   |
| Condensed Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2007 and March 31, 2006 |       |              | 5          |   |   |
|                                                                                                                    |       |              |       |   |   |
| Notes to Condensed Consolidated Financial Statements                                                                    |       |              | 6          |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                |       |              | 21         |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                                |       |              | 29         |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 4. Controls and Procedures                                                                                    |       |              | 29         |   |   |
|                                                                                                                    |       |              |       |   |   |
| PART  II. OTHER INFORMATION                                                                                             |       |              |       |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 1A. Risk Factors                                                                                                   |       |              | 30         |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 2. Unregistered Sales of Equity Securities  and Use of Proceeds                                               |       |              | 43         |   |   |
|                                                                                                                    |       |              |       |   |   |
| Item 6. Exhibits                                                                                                   |       |              | 44         |   |   |
|                                                                                                                    |       |              |       |   |   |
| SIGNATURES                                                                                                              |       |              | 45         |   |   |

 

2

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**PART I.** FINANCIAL INFORMATION

**Item 1.**                          CondensedConsolidated Financial Statements

**Vyyo Inc.**

**Consolidated Balance Sheets**

**(In thousands of U.S. $, except sharedata)**

 
| ** **                                                                                                                                                                                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                    |       |                     |       |                        |       |
| **Current Assets:**                                                                                                                                                                                           |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                        | 24,134     |                        | $          | 7,416 |   |
| Short-term  investments                                                                                                                                                                                       |       | 7,020                    |       | 11,272                      |       |
| Accounts  receivable trade, net:                                                                                                                                                                              |       |                     |       |                        |       |
| Related party  (note 3)                                                                                                                                                                                       |       | —                   |       | 991                         |       |
| Other                                                                                                                                                                                                         |       | 468                      |       | 194                         |       |
|                                                                                                                                                                                                          |       | 468                      |       | 1,185                       |       |
| Inventory, net  (note 2)                                                                                                                                                                                      |       | 2,320                    |       | 2,362                       |       |
| Other                                                                                                                                                                                                         |       | 923                      |       | 996                         |       |
| **Total Current  Assets**                                                                                                                                                                                     |       | 34,865                   |       | 23,231                      |       |
| **Long-Term Assets:**                                                                                                                                                                                         |       |                     |       |                        |       |
| Restricted cash  (note 4)                                                                                                                                                                                     |       | 5,000                    |       | 5,000                       |       |
| Property and  equipment, net                                                                                                                                                                                  |       | 1,662                    |       | 1,676                       |       |
| Employee rights  upon retirement funded (note 6)                                                                                                                                                              |       | 1,221                    |       | 1,168                       |       |
| Debt issuance  costs, net                                                                                                                                                                                     |       | 150                      |       | 1,074                       |       |
| **TOTAL  ASSETS**                                                                                                                                                                                             |       | $                        | 42,898     |                        | $          | 32,149 |   |
|                                                                                                                                                                                                          |       |                     |       |                        |       |
| **LIABILITIES AND CAPITAL  DEFICIENCY**                                                                                                                                                                       |       |                     |       |                        |       |
| **Current Liabilities:**                                                                                                                                                                                      |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                              |       | $                        | 1,349      |                        | $          | 1,719 |   |
| Accrued  liabilities (note 5)                                                                                                                                                                                 |       | 8,140                    |       | 7,877                       |       |
| Deferred  revenues-related party (note 3)                                                                                                                                                                     |       | 3,679                    |       | 3,795                       |       |
| **Total  Current Liabilities**                                                                                                                                                                                |       | 13,168                   |       | 13,391                      |       |
|                                                                                                                                                                                                          |       |                     |       |                        |       |
| **Long-Term Liabilities:**                                                                                                                                                                                    |       |                     |       |                        |       |
| Promissory note  (note 4)                                                                                                                                                                                     |       | 5,401                    |       | 5,078                       |       |
| Senior secured  note (note 7)                                                                                                                                                                                 |       | —                   |       | 5,085                       |       |
| Convertible note  (note 7)                                                                                                                                                                                    |       | 35,000                   |       | 10,097                      |       |
| Liability for  employee rights upon retirement (note 6)                                                                                                                                                       |       | 2,345                    |       | 2,111                       |       |
| **Total  Liabilities**                                                                                                                                                                                        |       | 55,914                   |       | 35,762                      |       |
| **Capital Deficiency:**                                                                                                                                                                                       |       |                     |       |                        |       |
| Preferred stock, $0.001  par value; 5,000,000 shares authorized, none issued                                                                                                                                  |       | —                   |       | —                      |       |
| Common stock, $0.0001  par value and paid in capital; 50,000,000 shares authorized, 18,316,231 and  18,114,031 shares issued and outstanding at March 31, 2007 and  December 31, 2006, respectively |       | 262,600                  |       | 260,966                     |       |
| Accumulated other  comprehensive loss                                                                                                                                                                         |       | (1                       | )          | (3                          | )          |
| Accumulated deficit                                                                                                                                                                                           |       | (275,615                 | )          | (264,576                    | )          |
| **Total  Capital Deficiency**                                                                                                                                                                                 |       | (13,016                  | )          | (3,613                      | )          |
| **TOTAL LIABILITIES AND CAPITAL DEFICIENCY**                                                                                                                                                                  |       | $                        | 42,898     |                        | $          | 32,149 |   |

* *

*The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.*

 

3

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**Vyyo Inc.**

**Condensed Consolidated Statements of Operations**

**(In thousands of U.S. $, except pershare data)**

**(Unaudited)**
| ** **                                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **REVENUES**                                                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues (note  10)                                                                              |       | $                                                | 462        |   | $ | 569 |   |
| Revenues from  related party (notes 3 and 10)                                                    |       | 161                                              |       | 1,800 |   |
|                                                                                             |       |                                             |       |   |   |
| **TOTAL REVENUES**                                                                               |       | 623                                              |       | 2,369 |   |
| **COST OF REVENUES**                                                                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cost of products  sold                                                                           |       | 618                                              |       | 318 |   |
| Cost of products  sold, related party                                                            |       | 80                                               |       | 1,492 |   |
| **Total  Cost of Revenues**                                                                      |       | 698                                              |       | 1,810 |   |
| **GROSS PROFIT (LOSS)**                                                                          |       | (75                                              | )          | 559 |   |
|                                                                                             |       |                                             |       |   |   |
| **OPERATING EXPENSES**                                                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Research and  development                                                                        |       | 2,868                                            |       | 2,461 |   |
| Sales and  marketing                                                                             |       | 1,881                                            |       | 2,643 |   |
| General and  administrative                                                                      |       | 2,047                                            |       | 3,009 |   |
|                                                                                             |       |                                             |       |   |   |
| **Total  Operating Expenses**                                                                    |       | 6,796                                            |       | 8,113 |   |
| ** **                                                                                       |       |                                             |       |   |   |
| **OPERATING LOSS**                                                                               |       | (6,871                                           | )          | (7,554 | ) |
| **FINANCIAL INCOME**                                                                             |       | 244                                              |       | 155 |   |
| **FINANCIAL EXPENSES**  (consists primarily of expenses for extinguishment of debt, note 7) |       | (4,162                                           | )          | (424 | ) |
|                                                                                             |       |                                             |       |   |   |
| **LOSS BEFORE INCOME TAXES**                                                                     |       | (10,789                                          | )          | (7,823 | ) |
| **INCOME TAX**                                                                                   |       | (250                                             | )          | (157 | ) |
| **LOSS FOR THE PERIOD**                                                                          |       | $                                                | (11,039    | ) | $ | (7,980 | ) |
|                                                                                             |       |                                             |       |   |   |
|                                                                                             |       |                                             |       |   |   |
| **LOSS PER SHARE**—  basic and diluted                                                      |       | $                                                | (0.61      | ) | $ | (0.50 | ) |
|                                                                                             |       |                                             |       |   |   |
| **WEIGHTED AVERAGE NUMBER OF  SHARES OUTSTANDING**                                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Basic and diluted                                                                                |       | 18,095                                           |       | 15,859 |   |

 

*The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.*

 

4

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**Vyyo Inc.**

**Condensed Consolidated Statements ofCash Flows**

**(In thousands of U.S. $)**

**(Unaudited)**
| ** **                                                                                                                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                                             |       |                                                   |       |   |   |
| Loss for the period                                                                                                                    |       | $                                                      | (11,039    | ) | $ | (7,980 | ) |
| Adjustments to reconcile  loss to net cash used in operating activities:                                                               |       |                                                   |       |   |   |
| Income and  expenses not involving cash flows:                                                                                         |       |                                                   |       |   |   |
| Depreciation and  amortization                                                                                                         |       | 218                                                    |       | 229 |   |
| Accretion and  amortization of financing instruments, net                                                                              |       | 3,715                                                  |       | 365 |   |
| Stock-based  compensation, net                                                                                                         |       | 886                                                    |       | 1,981 |   |
| Capital gain on  sales of property and equipment                                                                                       |       | (4                                                     | )          | — |   |
| Decrease  (increase) in assets and liabilities:                                                                                        |       |                                                   |       |   |   |
| Accounts  receivable — related party                                                                                              |       | 991                                                    |       | — |   |
| Accounts  receivable — other                                                                                                      |       | (274                                                   | )          | 164 |   |
| Other current  assets                                                                                                                  |       | 73                                                     |       | (29 | ) |
| Inventory                                                                                                                              |       | 42                                                     |       | 987 |   |
| Accounts payable                                                                                                                       |       | (370                                                   | )          | (379 | ) |
| Accrued  liabilities                                                                                                                   |       | 342                                                    |       | 217 |   |
| Deferred  revenues — related party                                                                                                |       | (116                                                   | )          | 57 |   |
| Liability for  employee rights upon retirement                                                                                         |       | 234                                                    |       | 301 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Net cash used in  operating activities                                                                                                 |       | (5,302                                                 | )          | (4,087 | ) |
|                                                                                                                                   |       |                                                   |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                                                              |       |                                                   |       |   |   |
| Purchase of property  and equipment                                                                                                    |       | (435                                                   | )          | (34 | ) |
| Purchase of short-term  investments                                                                                                    |       | (3,400                                                 | )          | (1,000 | ) |
| Proceeds from sales and  maturities of short-term investments                                                                          |       | 7,654                                                  |       | 4,739 |   |
| Proceed from sale of  property and equipment                                                                                           |       | 6                                                      |       | — |   |
| Contributions to  severance pay funds                                                                                                  |       | (53                                                    | )          | (31 | ) |
|                                                                                                                                   |       |                                                   |       |   |   |
| Net cash provided by  investing activities                                                                                             |       | 3,772                                                  |       | 3,674 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                                                              |       |                                                   |       |   |   |
| Proceeds from exercise  of stock options                                                                                               |       | 748                                                    |       | 1,054 |   |
| Proceeds from issuance  of common stock, Senior Secured Note, 2006 Convertible Note and warrants,  net of issuance cost |       | —                                                 |       | 23,820 |   |
| Proceeds from issuance  of 2007 Convertible Note                                                                                       |       | 35,000                                                 |       | — |   |
| Payments of Senior  Secured Note and 2006 Convertible Note                                                                             |       | (17,500                                                | )          | — |   |
| Net cash provided by  financing activities                                                                                             |       | 18,248                                                 |       | 24,874 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Increase in cash and  cash equivalents                                                                                                 |       | 16,718                                                 |       | 24,461 |   |
| Cash and cash  equivalents at beginning of period                                                                                      |       | 7,416                                                  |       | 2,548 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Cash and cash  equivalents at end of period                                                                                            |       | $                                                      | 24,134     |   | $ | 27,009 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information:**                                                                                 |       |                                                   |       |   |   |
| Cash paid for taxes                                                                                                                    |       | $                                                      | 8          |   | $ | 2 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Cash paid for interest                                                                                                                 |       | $                                                      | 709        |   | $ | — |   |

 

*The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.*

 

5

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**Vyyo Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

**1.****                                      GeneralBasis of Presentation**

The accompanying unaudited condensed consolidatedfinancial statements of Vyyo Inc. have been prepared in accordance withgenerally accepted accounting principles in the United States (“GAAP”) forinterim financial information and with the instructions to the Quarterly Reporton Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and notes required by GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals, reclassifications and adjustments) considered necessary fora fair presentation have been included. Operating results for the interimperiod are not necessarily indicative of the results that may be expected forthe full year. You should read these interim unaudited condensed consolidatedfinancial statements in conjunction with the audited consolidated financialstatements in the Annual Report on Form 10-K for the year ended December 31,2006, filed by Vyyo Inc. with the Securities and Exchange Commission (the “SEC”).

**Organization and Principles of Consolidation**

The unaudited condensed consolidated financialstatements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries(collectively, “Vyyo” or the “Company”). All material inter-company balancesand transactions have been eliminated in consolidation.

The Company provides cable and wireless broadbandaccess solutions through two business segments: the “Cable Solutions” segmentand the “Wireless Solutions” segment. The Company’s primary focus is now on itsCable Solutions segment, and significantly all of its internal resources arefocused on enhancing its visibility in and penetration of the cable market.

The Company’s products are designed to address fourmarkets: Cable, Telecommunication, Utility and Wireless Internet ServiceProviders (“WISP”). Although the Company is engaged to various degrees in thesedistinct markets, some of the Company’s core technologies overlap with itssolutions.

The Company’s Cable Solutions segment includesproducts that are used to deliver telephony and data T1/E1 links to enterpriseand cellular providers over cable’s wireless or hybrid-fiber coax (“HFC”)networks. Additionally, the Company’s “Spectrum Overlay” technology is designedto expand cable operators’ typical HFC network capacity in the “last mile” byup to two times in the downstream and up to four times in the upstream. TheCable Solutions segment also includes the results of operations of XtendNetworks Ltd., an Israeli privately-held company, and its wholly-owned,United States-based subsidiary, Xtend Networks Inc. (collectively, “Xtend”).

The Company’s Wireless Solutions segment includesproducts which enable utilities and other network service providers to operateprivate wireless networks for communications, monitoring and SupervisoryControl And Data Acquisition of their geographically disbursed, remote assets.Additionally, it includes the Company’s WISP and telecommunications productswhich address the needs of rural service providers to serve customers withwireless high-speed data beyond the reach of traditional terrestrial networks.

**Summary of Significant Accounting Principles**

***Financing***

On March 28, 2007, the Company closed the privateplacement (the “2007 Financing”) of a convertible note with Goldman,Sachs & Co. in exchange for $35,000,000 (the “2007 Convertible Note”),which included $17,500,000 of new funding and $17,500,000 of which the Companyused to pay off the $10,000,000 10% Convertible Note (the “2006 ConvertibleNote”) and $7,500,000 9.5% Senior Secured Note (the “Senior Secured Note”). The2007 Financing resulted in estimated net proceeds to the Company of approximately$17,350,000.  See note 7.

On March 23, 2006, the Company closed the privateplacement (the “2006 Financing”) of $25,000,000 of common stock, a ConvertibleNote, a Senior Secured Note and warrants to purchase common stock to Goldman,Sachs & Co. The 2006 Financing resulted in estimated net proceeds to the Company of approximately$23,400,000. See note 7.

6

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***Liquidity andCapital Resources***

The Company’s consolidated financial statements arepresented on a going concern basis, which contemplates the realization ofassets and satisfaction of liabilities in the normal course of business. TheCompany has experienced a significant loss from operations since itsincorporation. For the three months ended March 31, 2007, the Company incurreda net loss of $11,039,000 and had an accumulated deficit of $275,615,000. TheCompany’s ability to continue as a going concern will depend upon its abilityto raise additional capital or attain profitable operations. In addition, theCompany continues to seek to expand its revenue base by adding new customers.Failure to secure additional capital or to expand its revenue base to achieveprofitability, would likely result in the Company depleting its available fundsand not being able to pay its obligations when they become due. Theaccompanying unaudited interim consolidated financial statements do not includeany adjustments to reflect the possible future effects on the recoverabilityand classification of assets or the amounts and classification of liabilitiesthat may result if the Company is unable to continue as a going concern.

***Use of Estimates inthe Preparation of Financial Statements***

The preparation of financial statements in conformitywith GAAP requires management to make estimates, judgments and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates itsestimates, judgments and assumptions. Management bases its estimates, judgmentsand assumptions on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from these estimates, judgments and assumptions.

***Foreign CurrencyTransactions***

The United States dollar is the functional currencyfor the Company and its subsidiaries and all of its sales are made in UnitedStates dollars. In addition, a substantial portion of the costs of the Company’sforeign subsidiaries are incurred in United States dollars. Since the UnitedStates dollar is the primary currency in the economic environment in which theCompany and its foreign subsidiaries operate, monetary accounts maintained incurrencies other than the United States dollar (principally cash andliabilities) are remeasured into United States dollars using the representativeforeign exchange rate at the balance sheet date. Operational accounts andnonmonetary balance sheet accounts are measured and recorded at the rate ineffect at the date of the transaction. The effects of foreign currencyremeasurement are reported in current operations in the Statements ofOperations as part of “Financing Income” and “Financing Expense.”

***Investments inMarketable Securities***

The Company’s investments in debt securities have beendesignated as available-for-sale. Available-for-sale securities are carried atfair value, which is determined based upon the quoted market prices of thesecurities, with unrealized gains and losses reported in accumulated othercomprehensive income (loss), a component of capital deficiency, until realized.Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities are included in theStatements of Operations as part of “Financial Income” or “Financial Expenses,”as applicable. The Company views its available-for-sale portfolio as availablefor use in its current operations. Accordingly, the Company has classified allinvestments as short-term in the Statements of Operations under “Short-terminvestments,” even though the stated maturity date may be one year or more fromthe current balance sheet date. Interest, amortization of premiums, accretionof discounts and dividends on securities classified as available-for-sale arealso included in the Statements of Operations as part of “Financial Income” or “FinancialExpenses,” as applicable.

The Company recognizes an impairment charge when thedecline in the fair values of these investments below their cost basis isdeemed to be other-than-temporary. The Company considers various factors indetermining whether to recognize an impairment charge, including the length oftime and the extent to which the fair value has been below the cost basis, thecurrent financial condition of the investee and the Company’s intent andability to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value. The Company recognized another-than-temporary impairment in its available-for-sale securities of $0 and$(42,000) and realized losses of $0 and $31,000 for the three months endedMarch 31, 2007 and 2006, respectively.

7

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***Cash Equivalents***

Cash equivalents are short-term, highly-liquidinvestments and deposits that have original maturities of three months or lessat the time of investment and that are readily convertible to cash.

***Inventory***

Inventory is stated at the lower of cost or market,where cost includes material and labor. The Company regularly monitorsinventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on the Company’s estimated forecast of future productdemand and production requirements. Although the Company makes every effort toensure the accuracy of its forecasts of future product demand, any significantunanticipated changes in demand or technological developments wouldsignificantly impact the value of the inventory and the reported operatingresults. If actual market conditions are different than the Company’sassumptions, additional provisions may be required. The Company’s estimates offuture product demand may prove to be inaccurate, in which case the Company mayhave understated or overstated the provision required for excess and obsoleteinventory. In the future, if the inventory is determined to be overvalued, theCompany would be required to recognize such costs in its cost of sales at thetime of such determination. If the Company’s inventory is determined to beundervalued, the Company may have overstated its cost of sales in previousperiods and would be required to recognize additional operating income onlywhen the undervalued inventory was sold. During the three months ended March31, 2007 and 2006, the Company did not write-down any inventory.

The Company adopted the provisions of the FinancialAccounting Standards Board (“FASB”) Statement No. 151, “Inventory Costs” (“FASB151”), as of January 1, 2006, which did not have a material effect on theCompany’s financial statements. FASB 151 requires that abnormal idle facilityexpenses be recognized as current-period charges, and that allocation of fixedproduction overhead costs to inventory be based on normal capacity of theproduction facility.

***Fair Value ofFinancial Instruments***

The fair value of the financial instruments includedin the Company’s working capital approximates carrying value. The SyntekPromissory Note, the Senior Secured Note and the 2006 Convertible Notedelivered in the 2006 Financing and the 2007 Convertible Note delivered in the2007 Financing are presented in the Balance Sheets as “Long-Term Liabilities,”at approximately their estimated fair value.

***Debt Issuance Costs***

 Costs incurred in the issuance of the 2007Convertible Note in the 2007 Financing included cash payments to legal advisorsin the three months ended March 31, 2007. Costs incurred in the issuance of the2006 Convertible Note and Senior Secured Note to the Company’s financialadvisor included warrants to purchase shares of the Company’s common stock andcash payments to legal and financial advisors in the year ended December 31,2006. In the year ended December 31, 2006, the fair value of the warrants wasdetermined based on the Black-Scholes option-pricing model. Issuance cost aredeferred and amortized as a component of interest expense over the period fromissuance through the first redemption date.

***Extinguishment ofDebt***

As noted above, in the 2007 Financing, the Companyrepaid the 2006 Convertible Note and Senior Secured Note. The Company accountedfor this repayment as “extinguishment of debt” under the Emerging Issues TaskForce (“EITF”) 96-19, “Debtor’s Accounting for a Modification or Exchange ofDebt Instruments” (“EITF 96-19”). The 2007 Convertible Note was initiallyrecorded at fair value, and that amount was used to determine the debtextinguishment loss of $3,263,000 recognized as a result of $2,231,000unamortized accretion and $1,032,000 unamortized issuance expenses related tothe 2006 Convertible Note and Senior Secured Note.

***Property andEquipment***

Property and equipment are stated at cost lessaccumulated depreciation and amortization. Depreciation and amortization areprovided using the straight-line method over the estimated useful lives of theassets.

Leasehold improvements are amortized over the shorterof the lease term or the estimated useful life of the related asset.

8

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***Impairment of Long-Lived Assets***

Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”(“SFAS No. 144”), requires that long-lived assets, including definite lifeintangible assets to be held and used or disposed of by an entity, be reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. Under SFAS No. 144,if the sum of the expected future cash flows (undiscounted and without interestcharges) of the long-lived assets is less than the carrying amount, the Companywould recognize an impairment loss and would write down the assets to theirestimated fair values.

***Revenue Recognition***

The Company generates revenues from sales of itsproducts. As of March 31, 2007, the Company’s revenues from services were notsignificant. The Company’s products are off-the-shelf products, sold “as is,”without further adjustment or installation. When establishing a relationshipwith a new customer, the Company also may sell these products together as apackage, in which case the Company typically ships products at the same time tothe customer.

 Revenues from the Company’s products arerecorded when (a) persuasive evidence of an arrangement exists;(b) delivery has occurred and customer acceptance requirements have beenmet, if any, and the Company has no additional obligations; (c) the priceis fixed or determinable; and (d) collection of payment is reasonablyassured. The Company’s standard sales terms generally do not include customeracceptance provisions. However, where there is a right of return, customeracceptance provision or there is uncertainty about customer acceptance, theassociated revenue is deferred until the Company has evidence of customeracceptance.

EITF No. 00-21, “Revenue Arrangements withMultiple Deliverables” (“EITF No. 00-21”), addresses when and how anarrangement involving multiple deliverables should be divided into separateunits of accounting. The Company’s multiple deliverables arrangements are thosearrangements with new customers in which the Company sells its productstogether as a package. Because the Company delivers these off-the-shelfproducts at the same time and the four revenue recognition criteria discussedabove are met at that time, the adoption of EITF No. 00-21 had no impacton the Company’s financial position and results of operations.

The Company recognizes revenues related to theexclusivity provisions contained in the equipment purchase agreement withArcadian Networks, Inc. on a straight line basis, over the 10-year term ofthat agreement.

***Product Warranty***

The Company provides for product warranty costs whenit recognizes revenue from sales of its products. The provision is calculatedas a percentage of sales, based on historical experience.

***Research andDevelopment Costs***

Research and development costs are expensed asincurred and consist primarily of personnel, facilities, equipment and suppliesfor research and development activities. Grants received from the Office of theChief Scientist at the Ministry of Industry and Trade in Israel and otherresearch foundations are deducted from research and development expenses as therelated costs are incurred or as the related milestone is met.

***Loss Per Share ofCommon Stock***

Basic and diluted loss per share are calculated and presented inaccordance with SFAS No. 128, “Earnings Per Share” (“SFAS No. 128”),for all periods presented. All outstanding stock options and shares ofrestricted stock have been excluded from the calculation of the diluted lossper share because all such securities are not dilutive for the presentedperiods. For the three months ended March 31, 2007, the total number of sharesof common stock related to outstanding options and the 2007 Convertible Noteand warrants issued in connection with the 2006 Financing and restricted stockexcluded from the calculations of diluted loss per share were 10,118,466. Forthe three months ended March 31, 2006, the total number of shares of commonstock related to outstanding options and the 2006 Convertible Note, warrantsissued in connection with the 2006 Financing and restricted stock excluded fromthe calculations of diluted loss per share were 7,579,390.

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***Stock-BasedCompensation***

Prior to January 1, 2006, the Company accountedfor employees’ stock-based compensation under the intrinsic value model inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and related interpretations. Inaccordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”),as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”.

Effective January 1, 2006, the Company adoptedSFAS No. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”).SFAS 123(R) supersedes APB 25 and related interpretations and amends SFASNo. 95, “Statement of Cash Flows.” SFAS 123(R) requires that awardsclassified as equity awards be accounted for using the grant-date fair valuemethod. The fair value of stock options is determined based on the number ofshares granted and the price of the Company’s common stock, and determinedbased on the Black-Scholes, Monte Carlo and the binomial option-pricing models,net of estimated forfeitures. The Company estimated forfeitures based onhistorical experience and anticipated future conditions. The Monte Carlovaluation model is used only for stock options granted to executives in 2005and 2006 if vesting is subject to market condition criteria.

In March 2005, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”).SAB 107 provides supplemental implementation guidance on SFAS 123(R),including guidance on valuation methods, inventory capitalization ofstock-based compensation cost, income statement effects, disclosures and otherissues. SAB 107 requires stock-based compensation to be classified in the sameexpense line items as cash compensation. The Company has applied the provisionsof SAB 107 in its adoption of SFAS 123(R). In addition, the Company hasreclassified stock-based compensation from prior periods to correspond tocurrent period presentation within the same operating expense line items ascash compensation paid to employees.

The Company elected to recognize compensation cost foroptions granted with service conditions that have graded vesting schedulesusing the graded vesting attribution method.

The Company elected to adopt the modified prospectivetransition method permitted by SFAS 123(R). Under this transition method,the Company implemented SFAS 123(R) as of the first quarter of 2006 withno restatement of prior periods. The valuation provisions of SFAS 123(R)apply to new awards and to awards modified, repurchased or cancelled afterJanuary 1, 2006. Additionally, compensation cost for the portion of awardsfor which the requisite service has not been rendered that are outstanding asof January 1, 2006 are recognized over the remaining service period usingthe grant-date fair value of those awards as calculated for pro formadisclosure purposes under SFAS 123.

In November 2005, FASB issued Staff Position No.SFAS 123(R)-3 “Transition Election Related to Accounting for Tax Effectsof Share-Based Payment Awards.” The Company has elected to adopt thealternative transition method provided in this FASB Staff Position forcalculating the tax effects of stock-based compensation pursuant toSFAS 123(R). The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in capital poolrelated to the tax effects of employee stock-based compensation, which isavailable to absorb tax deficiencies recognized after adoption ofSFAS 123(R).  As of January 1,2006, the cumulative effect of the Company’s adoption of SFAS 123(R) wasnot material.

The Company accounts  forequity instruments issued to third party service providers (non-employees)  in accordance with the fair value of the instrumentsbased on an option-pricing model, pursuant  to the guidance inEITF 96-18 “Accounting for Equity Instruments That  AreIssued to Other Than Employees for Acquiring, or in Conjunction with  Selling Goods or Services.” The Company revaluates thefair value of the options granted over the related service periods andrecognizes the value over the vesting period using the Black-Scholes model.

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The fair value of each stock option granted during thethree months ended March 31, 2007 and 2006 was estimated at the date of grantusing the Black-Scholes and the binomial valuation models, using the followingassumptions:
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Black-Scholes  model assumptions:              |       |                                             |       |   |   |
| Risk-free interest rates ranges                |       | 4.68%                                            |       | 4.66%-4.74% |   |
| Weighted-average expected life range           |       | 10                                               |       | 2.5-5.0 |   |
| Volatility ranges                              |       | 0.61                                             |       | 0.62-0.76 |   |
| Dividend yields                                |       | —                                           |       | — |   |
|                                           |       |                                             |       |   |   |
|  Monte Carlo valuation model assumptions: |       |                                             |       |   |   |
| Risk-free interest rate                        |       | —                                           |       | 4.60% |   |
| Weighted-average expected life                 |       | —                                           |       | 5.22 |   |
| Volatility                                     |       | —                                           |       | 0.61 |   |
| Dividend yields                                |       | —                                           |       | — |   |
|                                           |       |                                             |       |   |   |
| Binomial  valuation model assumptions:         |       |                                             |       |   |   |
| Risk-free interest rates ranges                |       | 4.46%-5.16%                                      |       | 4.20%-4.60% |   |
| Weighted-average expected life range           |       | 2.79-6.54                                        |       | 0.08-8.42 |   |
| Volatility ranges                              |       | 0.33-0.85                                        |       | 0.61-0.63 |   |
| Dividend yields                                |       | —                                           |       | — |   |

 

***Recent AccountingPronouncements***

In December 2006,FASB issued Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements”**(“EITF 00-19-2”). EITF 00-19-2specifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement should beseparately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” EITF00-19-2 is effective immediately for registration payment arrangements and thefinancial instruments subject to those arrangements that are entered into ormodified after December 21, 2006. For registration payment arrangementsand financial instruments subject to those arrangements that were entered intoprior to December 21, 2006, the guidance in the EITF 00-19-2 is effectivefor fiscal years beginning after December 15, 2006. The Company does notexpect FSP EITF 00-19-2 to have a material impact on the Company’sconsolidated financial statements.

In February 2007,FASB issued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”). This standard permits companies to choose to measuremany financial assets and financial liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. This statement will be effective for the Company asapplicable beginning January 1, 2008. The Company is currently evaluatingthe impact that the adoption of SFAS 159 would have on its consolidatedfinancial statements.

***Reclassifications***

Certain amounts in the 2006 financial statements havebeen reclassified to conform to the 2007 presentation.

**2.****             Inventory,net**

Inventory is comprised of the following:

|                 | ** ** | **March 31,**                                     | ** **   | **December 31,** | ** ** |
|-----------------|------------|--------------------------------------------------------|--------------|-----------------------|------------|
| ** **      | ** ** | **2007**                                               | ** **   | **2006**              | ** ** |
| ** **      | ** ** | **(In thousands of U. S. $)** | *** *** |
| Raw materials   |       | $                                                      | 421          |                  | $          | 395 |   |
| Work in process |       | 455                                                    |         | 445                   |       |
| Finished goods  |       | 1,444                                                  |         | 1,522                 |       |
|            |       |                                                   |         |                  |       |
|            |       | $                                                      | 2,320        |                  | $          | 2,362 |   |

 

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**3.****             Agreementwith Arcadian Networks, Inc.**

On March 31, 2006, the Company entered into anEquipment Purchase Agreement (the “ANI Agreement”) with ArcadianNetworks, Inc. (“ANI”). Davidi Gilo, the Company’s Chairman of the boardof directors and former Chief Executive Officer, is also the Chairman of theboard of directors of ANI and the sole member of the limited liability companythat is the general partner of a major stockholder of ANI. Avraham Fischer, adirector of the Company, is co-chief executive officer and a director of ClalIndustries and Investments, Ltd. (“Clal”), which invested $20,000,000 inANI in August 2006.  Goldman, Sachs& Co., a major stockholder in the Company and holder of the 2007Convertible Note is a stockholder of ANI.

Pursuant to the ANI Agreement, the Company sellscertain of its products and services to ANI over a 10-year term. The Companydistributes these products to ANI on an exclusive basis in the United States,Canada and the Gulf of Mexico (the “Relevant Territory”) to identified marketsif: (a) ANI makes two payments of $4,000,000 during each of the first twoyears of the ANI Agreement; (b) ANI meets specified annual minimum productpurchase amounts; and (c) ANI’s outstanding balances are below specifiedamounts. The exclusivity payments are not refundable under any circumstances.

Exclusivity after the second year will depend on ANI’smeeting the minimum purchase amounts. In addition, to maintain its exclusivityrights in the ANI Agreement, ANI must purchase at least 25% of its minimumproduct purchase amounts within the first six months of any given year, and atleast 32% within the first six months of any given year if ANI purchases fromthird parties more than 15% of products with similar functionality to theproducts covered by the ANI Agreement.

The ANI Agreement fixes the product prices for thefirst two years, after which time prices are subject to adjustment according tothe amount of product purchased by ANI compared to specified forecastedpurchase amounts.

The ANI Agreement does not prohibit the Company fromselling any of its products or services to areas outside of the Relevant Territory.In addition, the Company may sell its products within the Relevant Territory toend users or resellers other than those engaged in the following markets:(a) electricity generation, transmission or distribution (both downstreamand upstream); (b) oil or gas exploration, manufacture, transportation ordistribution; (c) water utility; (d) chemical manufacture;(e) mining; (f) environmental monitoring or protection;(g) transportation facilities (including railroads); (h) bordercontrol; and (i) public safety. Specifically, the Company may sell itsproducts in the Relevant Territory to cable television customers.

The Company received an initial purchase order for$10,000,000 on March 31, 2006 (related to products to be purchased in thefirst year of the ANI Agreement) and the first exclusivity payment of$4,000,000 on April 3, 2006 which satisfied ANI’s requirements forexclusivity in the first year of the ANI Agreement. As of March 31, 2007,the Company had not received the second $4,000,000 exclusivity payment.

For the three months ended March 31, 2007, the Companyrecognized revenue of $161,000 under the ANI Agreement, which included incomerelated to the exclusivity payment of $100,000 and product maintenance of$61,000. The Company will recognize the exclusivity payments from ANI over the10-year term of the ANI Agreement. As of the date of this report, ANI did nothave an outstanding accounts receivable balance and the Company had deferredrevenues from ANI sales of $3,679,000.

**4.****             PromissoryNote**

On June 30, 2004, the Company acquired all of theoutstanding shares of Xtend, an Israeli privately-held company that was adevelopment stage company at the time. As part of the purchase, the Companydelivered a Promissory Note in the principal amount of $6,500,000 originallypayable on March 31, 2007 (the “Syntek Promissory Note”). The Companyaccounted for the Syntek Promissory Note as contingent consideration since itwas payable only if the Company was unable to meet certain key provisions, asdescribed in the Syntek Promissory Note. These key provisions were amended onDecember 16, 2005 as follows:

·                                           thematurity date was extended by one year from March 31, 2007 toMarch 31, 2008;

·                                          theprovision that would have allowed acceleration of the Syntek Promissory Note ifthe sum of the Company’s cash, cash equivalents, short-term investments andaccounts receivables, net of short- and long-term debt, was less than$20,000,000 on December 31, 2005 or June 30, 2006 was waived;

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·                                           TheSyntek Promissory Note provides for cancellation in the event that:

(a)                                 the Company’s revenue (including that of allsubsidiaries, except for newly acquired businesses) equals or exceeds$60,000,000 million and gross margin equal or exceeds 35%, for the yearended December 31, 2007;

(b)                                beginning on the first day that the Company’scommon stock closes at or above $18.00 per share and at any time thereafter, asale by the holder of all of its Remaining Shares at an average sales price ator above $18.00 per share. “Remaining Shares” means those shares of the Company’scommon stock received by the holder in connection with the acquisition;

(c)                                 all of the Remaining Shares are included in asuccessfully concluded secondary offering (on Form S-3 or otherwise) at anoffering price at or above $18.00 per share in which the holder either(i) sells all of the Remaining Shares or (ii) is provided anopportunity to sell all of such shares into such secondary offering and electsnot to sell, provided that the successfully concluded offering included nofewer than the number of Remaining Shares; or

(d)                                the receipt by the holder of a bona fide offer forthe purchase of all of the Remaining Shares at an average sales price at orabove $18.00 per share. A “bona fide” offer means a fully funded andunconditional offer for purchase by a buyer who has provable and sufficientfinancial resources to purchase all of the Remaining Shares for cash within acommercially reasonable period of time from the date of offer, not to exceed30 days.

As security for the amendedSyntek Promissory Note, the Company delivered a $5,000,000 irrevocable letterof credit, and deposited $5,000,000 with an Israeli bank and agreed torestrictions on withdrawal of this amount until the letter of credit iscancelled.  The letter of credit will becancelled if, for 45 consecutive trading days, all of the following conditionsexist: (a) the weighted average trading price of the Company’s commonstock is equal to or higher than $18.00 per share; (b) the average dailytrading volume of the Company’s common stock is higher than 150,000 shares perday; and (c) the holder is lawfully able to sell publicly in onetransaction or in a series of transactions, during such 45 consecutive tradingdays, all of its shares of the Company’s common stock without registrationunder the Securities Act of 1933, as amended.

The Company determined that, asof the time of the amendment of the Syntek Promissory Note in December 2005 and immediately prior to its amendment,the contingency had been resolved and therefore the Company recorded $6,500,000as additional consideration paid in the Xtend acquisition. This resulted in anincrease to the intangible assets acquired. Following an impairment testperformed on the intangible assets, the assets were immediately impaired. Inaddition, the Company estimated the fair value of the amended Syntek PromissoryNote at $3,967,000 and recorded this amount in the Balance Sheets as along-term liability under “Promissory note.” The Company recorded $2,533,000,the difference between the value of the amended Syntek Promissory Note and theoriginal Syntek Promissory Note, as “Gain Resulting from Amendment toPromissory Note” in the Consolidated Statements of Operations. In future periodsthe Company will record an accretion to the value of the amended SyntekPromissory Note up to $6,500,000. The Company will record the accretion of$2,533,000 as finance expenses during the remaining term of the amended SyntekPromissory Note, unless it is cancelled as provided above. For the three monthsended March 31, 2007, the Company recorded $323,000 in financial expensesrelated to the accretion of the amended Syntek Promissory Note.

 

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**5.****                                      AccruedLiabilities**

Accrued liabilities consist of the following:

|                                               | ** ** | **March 31,**                               | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                                    | ** ** | **(In thousands of U.S. $)** | ** ** |
| Withholding tax                               |       | $                                                | 3,577      |                  | $          | 3,321 |   |
| Compensation and  benefits                    |       | 2,185                                            |       | 1,995                 |       |
| Royalties                                     |       | 950                                              |       | 940                   |       |
| Professional fees                             |       | 322                                              |       | 361                   |       |
| Deferred rent                                 |       | 361                                              |       | 354                   |       |
| Interest payable to  Goldman, Sachs & Co. |       | 14                                               |       | 285                   |       |
| Warranty*                                     |       | 57                                               |       | 66                    |       |
| Deferred revenues                             |       | 70                                               |       | 66                    |       |
| Other                                         |       | 604                                              |       | 489                   |       |
|                                          |       | $                                                | 8,140      |                  | $          | 7,877 |   |

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*                    Thechanges in the warranty balances consist of the following:

|                                                | ** ** | **Three Months  Ended  March 31,**     | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                         | ** ** | **2006**                               | ** ** |
| ** **                                     | ** ** | **(In thousands of U.S. $)** | ** ** |
| Balance at beginning of  period                |       | $                                                | 66         |                                   | $          | 104 |   |
| Usage of warranty                              |       | —                                           |       | (59                                    | )          |
| Product warranty issued  for new sales         |       | 23                                               |       | 177                                    |       |
| Changes in accrual of  warranty periods ending |       | (32                                              | )          | (156                                   | )          |
| Balance at end of period                       |       | $                                                | 57         |                                   | $          | 66 |   |

 

**6.****                                      SeveranceLiabilities**

The amounts paid related to severance and severanceexpenses were:

|                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Amounts paid related to  severance |       | $                                                | 129        |   | $ | 174 |   |
|                               |       |                                             |       |   |   |
| Severance expenses*                |       | $                                                | 310        |   | $ | 397 |   |

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*                    Withrespect to the Company’s Israeli employees, the Company expects to contribute$366,000 to a defined contribution plan and $159,000 to insurance and pensionplans for the year ended December 31, 2007(includes amounts contributed in the three months ended March 31, 2007).

**7.****                                      Financing**

**2007Financing**

 On March 28, 2007, the Company issued the2007 Convertible Note ($35,000,000 principal; 5% annual interest), initiallyconvertible into 3,500,000 shares of the Company’s common stock to Goldman,Sachs & Co., of which $17,500,000 was used to pay off in full theCompany’s outstanding 2006 Convertible Note and Senior Secured Note deliveredin the 2006 Financing described below.

The 2007 Convertible Note is convertible at the holder’soption into shares of the Company’s common stock at a conversion price of$10.00 per share, provided, that in no event may the holder own of record morethan 14.8% of the outstanding shares of the Company’s common stock. In theevent of a Fundamental Transaction (as defined in the 2007 Convertible Note toinclude sales of the Company’s assets and certain business combinationtransactions), the 

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holder may, at its option, require the Company toredeem all or any portion of the 2007 Convertible Note at a price equal to 101%of the principal amount, plus all accrued and unpaid interest, if any, and,subject to specified conditions, may be entitled to a cash “make-whole”premium, calculated in accordance with the terms of the 2007 Convertible Note.

Under the Amended and Restated Registration RightsAgreement executed in connection with the 2007 Convertible Note, the Company isrequired to file a registration statement on Form S-3 registering theresale of the shares issuable upon conversion of the 2007 Convertible Note foran initial two-year period, subject to extension under specified circumstances.

The Company accounted for the issuance of the 2007Convertible Note (and the resulting repayment of the 2006 Convertible Note andSenior Secured Note) as extinguishment of debt under EITF 96-19. As a result ofthe extinguishment of the 2006 Convertible Note and Senior Secured Note, theCompany recorded $3,263,000 in the three months ended March 31, 2007 asfinancial expenses consisting of $2,231,000 of unamortized accretion and$1,032,000 of unamortized issuance expenses.

In accordance with the provisions of EITF 96-19, theCompany recorded the 2007 Convertible Note at its fair value, which isestimated at $35,000,000. The 2007 Financing resulted in estimated net proceedsto the Company of approximately $17,350,000, following pay off of the 2006Convertible Note and Senior Secured Note and payment of issuance expenses ofapproximately $150,000.

**2006 Financing**

On March 23, 2006, the Company closed the privateplacement of $25,000,000 of common stock, a Convertible Note, a Senior SecuredNote and warrants to purchase common stock to Goldman, Sachs & Co. In the2006 Financing, the Company issued (a) 1,353,365 shares of common stock,(b) the 2006 Convertible Note ($10,000,000; 10% annual interest),(c) the Senior Secured Note ($7,500,000 principal; 9.5% annual interest),and (d) warrants to purchase 298,617 shares of common stock. Thetransaction resulted in estimated net proceeds to the Company of approximately$23,400,000.

The Company allocated the proceeds received in the2006 Financing to the different instruments based on the relative fair value ofeach instrument as follows:

|                                                                          | ** ** | ** **          | ** ** | **Relative fair** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **Face value** | ** ** | **value**              | ** ** |
| 1,353,365 shares of  common stock                                        |       | $                   | 7,500,000  |                   | $          | 8,260,000 |   |
| 10% Convertible Note                                                     |       | 10,000,000          |       | 10,111,000             |       |
| 9.5% Senior Secured  Note                                                |       | 7,500,000           |       | 4,830,000              |       |
| Warrants to purchase  298,617 shares of common stock for $0.10 per share |       | —              |       | 1,799,000              |       |
| Total gross proceeds received in 2006 Financing                          |       | $                   | 25,000,000 |                   | $          | 25,000,000 |   |

 

The estimated issuance costs of the 2006 Financingwere approximately $1,993,000 including (a) a $1,210,000 payment and issuanceof warrants to purchase 79,559 shares of the Company’s common stock, atexercise prices ranging from $0.10 to $10.00 (at an estimated fair value of$366,000), to the Company’s financial advisor and (b) approximately $417,000for legal and other professional fees and costs. Of these estimated issuancecosts, $806,000 and $385,000 were allocated to the 2006 Convertible Note andthe Senior Secured Note, respectively. These costs were amortized based on theeffective interest amortization method through the five-year term untilmaturity of the notes and recorded as interest expense, based on the effectiveinterest method of amortization.  Theissuance costs described above were allocated to the different instrumentsbased on their relative fair values.

As noted above, the Company repaid in full the 2006Convertible Note and Senior Secured Note with proceeds from the 2007 Financing,and the unamortized accretion and unamortized issuance expenses were extinguishedat that time.

**8.****                                      Stock-BasedCompensation**

**Common Stock Reserved for Issuance**

As of March 31, 2007,the Company reserved approximately 727,709 shares of common stock for issuance,upon exercise of stock options and issuance of shares of restricted stockreserved under its stock-based compensation plans.  These shares are available for issuance underthe plans described below.

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**Stock Option Plans**

The Company has the following stock option plans: the1999 Employee and Consultant Equity Incentive Plan and the Third Amended andRestated 2000 Employee and Consultant Equity Incentive Plan (the “2000 Plan”).The Company’s 1996 Equity Incentive Plan expired by its terms as of February 3,2006. The Company currently makes grants only from the 2000 Plan, which permitsthe grant of incentive stock options (“ISOs”) to employees, nonstatutory stockoptions to employees, directors and consultants and stock options which complywith Israeli law if granted to persons who are subject to Israel income tax.The 2000 Plan also provides for the awards of restricted stock and stockbonuses.

ISOs must have an exercise price equal to the fairvalue of the common stock on the grant date as determined by the Company’sboard of directors. The period within which the option may be exercised isdetermined at the time of grant, but may not be longer than 10 years. Thenumber of shares reserved under the 2000 Plan is subject to automatic annualincreases on the first day of each fiscal year, equal to the lesser of1,000,000 shares or 10% of the number of outstanding shares on the last day ofthe immediately preceding year. On May 10, 2007, the Company’s stockholdersincreased the 1,000,000 shares added annually to the 2000 Plan to 1,500,000shares effective as of January 1, 2008 and, effective immediately, added anadditional 1,000,000 shares to the total number available for issuance underthe 2000 Plan.

In August 2005, the Company granted certain employeesoptions to purchase 145,000 shares of the Company’s common stock at an exerciseprice of $0.10 per share. The market price on the date of grant was $6.75,which resulted in deferred stock compensation of $964,000, of which $222,000was amortized during the year ended December 31, 2005 under APB No. 25.

In March 2005, the Company granted certain executives630,000 options to purchase shares of common stock for $7.50 to $10.50 pershare. The options vest and become exercisable if the closing price of theCompany’s common stock is at or above specified prices for 10 trading days outof any 30 consecutive trading days, so long as the optionee remains an employeeof or consultant to the Company on the 10th day of the period. The optionsexpire five years after the grant date, or, if earlier, 90 days after theoptionee is no longer an employee of or consultant to the Company. As of March31, 2007, 135,000 of these stock options were forfeited. In the three monthsended March 31, 2007 and 2006, the Company recorded expenses of $117,000 and$117,000, respectively, related to these stock options.

In March 2007, the Company granted its Vice Chairmanof the board of directors 250,000 options to purchase shares of common stockfor $6.31 per share. This grant was made to the Vice Chairman in his individualcapacity as a consultant to the Company. The options vest and becomeexercisable in equal monthly installments over 48 months. These stockoptions may be accelerated upon the occurrence of specified events, includingcertain financing events, approval of the Company’s products in identifiedcable companies or upon a “Change of Control” (as defined in the ConsultingAgreement). In the three months ended March 31, 2007, the Company recordedexpenses of $36,000 related to these stock options.

**Grant of Stock Options to Davidi Gilo**

On February 10, 2006, the Company’s CompensationCommittee approved the grant of stock options to Mr. Gilo, Chairman of theboard of directors, to purchase 900,000 shares of the Company’s common stock.At the time, Mr. Gilo also was Chief Executive Officer of the Company. Theseoptions vest as follows:

(a)                 300,000 sharesvested upon the closing of the Financing.

(b)                300,000 sharesvest at such time as the per share price of the Company’s common stock closesat or above $10.44 for a period of any 22 (consecutive or non-consecutive)trading days, so long as Mr. Gilo remains an employee of or consultant tothe Company on the 22nd day of such period.

(c)                 300,000 sharesvest at such time as the per share price of the Company’s common stock closesat or above $15.66 for a period of any 22 (consecutive or non-consecutive)trading days, so long as Mr. Gilo remains an employee of or consultant tothe Company on the 22nd day of such period.

The Company recorded stock-based compensation expensesof $750,000 for the three months ended March 31, 2006 related to the300,000 options granted to Mr. Gilo that vested upon the closing of the2006 Financing. In connection with the 600,000 stock options granted toMr. Gilo which vest based on the closing price of the Company’s commonstock, the Company recorded $79,000 and $30,000 in the three months ended March31, 2007 and 2006, respectively. These stock-based compensation expenses weredetermined based on the Monte Carlo valuation method.

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**Restricted Stock**

Recipients of shares of restricted stock are entitledto cash dividends, to the extent paid, and to vote their shares throughout therestricted period. The shares are valued at the market price on the grant date,and compensation is amortized ratably over the vesting period. The Company mustrecognize compensation expenses for shares of restricted stock subject todesignated performance criteria if the performance criteria are being attainedor it is probable that they will be attained.

In July 2004,the Company granted a former Xtend employee 146,000 shares of restricted stock,of which 71,000 shares have vested and 75,000 shares were to vest subject todesignated performance criteria. In the three months ended March 31, 2007,the Company did not record compensation expenses since it did not achieve theperformance conditions related to the remaining restricted stock.

A summary of stock option plans, shares of restrictedstock and related information, under all of the Company’s equity incentiveplans as of March 31, 2007 is as follows (in thousands, except per share data):
| ** **                  | ** ** | ** **          | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** **          | ** ** |
|-----------------------------|------------|---------------------|------------|-----------------|------------|--------------|------------|---------------------|------------|
| ** **                  | ** ** | **Options/Shares**  | ** ** | ** **      | ** ** | **average**  | ** ** | **Weighted**        | ** ** |
| ** **                  | ** ** | **available**       | ** ** | **Number**      | ** ** | **exercise** | ** ** | **average**         | ** ** |
| ** **                  | ** ** | **for grants** | ** ** | **outstanding** | ** ** | **price**    | ** ** | **fair value** | ** ** |
| Balance at January 1,  2007 |       | 559                 |       | 6,063           |       | $            | 5.41       |                | —     |   |
| Authorized                  |       | 1,000               |       | —          |       | —       |       | —              |       |
| Granted*                    |       | (1,130              | )          | 1,130           |       | $            | 5.86       |                | $          | 2.65 |   |
| Exercised                   |       | —              |       | (278            | )          | $            | 4.82       |                | —     |   |
| Cancelled                   |       | 299                 |       | (299            | )          | $            | 6.53       |                | —     |   |
| Balance at March 31, 2007   |       | 728                 |       | 6,616           |       | $            | 5.46       |                | —     |   |
|                             |            |                     |            |                 |            |              |            |                     |            |  |  |

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*                    Includes51,250 options granted to non-employee directors in the three months endedMarch 31, 2007 and additional 250,000 options granted to the Vice Chairman whoalso serves as a consultant.

The following table summarizes information concerningoutstanding and exercisable options under stock option plans as of March 31,2007:
| ** **                      | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **average**                  | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **remaining**                | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| **Range of exercise** | ** ** | **Number**                   | ** ** | **contractual**              | ** ** | **price per** | ** ** | **Number** | ** ** | **price per** | ** ** |
| **Prices**                      | ** ** | **outstanding**              | ** ** | **life**                     | ** ** | **Share** | ** ** | **exercisable** | ** ** | **share** | ** ** |
| ** **                      | ** ** | **(In thousands)**      | ** ** | **(In years)**          | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Plans:                          |       |                         |       |                         |       |   |   |   |   |   |   |
| 0.10                            |       | 126                          |       | 3.52                         |       | $ | 0.10 |   | 44 |   | $ | 0.10 |   |
| 0.99                            |       | 3                            |       | 0.86                         |       | 0.99 |   | 3 |   | 0.99 |   |
| 2.27-3.40                       |       | 637                          |       | 3.71                         |       | 3.24 |   | 470 |   | 3.20 |   |
| 3.57-5.22                       |       | 2,725                        |       | 4.89                         |       | 4.64 |   | 1,405 |   | 4.43 |   |
| 5.60-8.39                       |       | 2,999                        |       | 4.41                         |       | 6.73 |   | 1,048 |   | 6.76 |   |
| 8.43-10.50                      |       | 126                          |       | 2.70                         |       | 9.44 |   | 35 |   | 9.05 |   |
|                            |       | 6,616                        |       | 4.49                         |       | $ | 5.46 |   | 3,005 |   | $ | 5.04 |   |

 

**9.****                                      ComprehensiveLoss**

The components of comprehensive loss are as follows:

|                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(In thousands of U.S. $)** | ** ** |
| Loss                                              |       | $                                                | (11,039    | ) | $ | (7,980 | ) |
| Unrealized loss on  available-for-sale securities |       | (1                                               | )          | — |   |
| Comprehensive loss                                |       | $                                                | (11,040    | ) | $ | (7,980 | ) |

 

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**10.****          SegmentReporting**

The Company’s business is divided into two segments: “CableSolutions” and “Wireless Solutions.”

|                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Consolidated revenues  from:       |       |                                             |       |   |   |
| Cable Solutions                    |       | $                                                | 462        |   | $ | 463 |   |
| Wireless  Solutions:               |       |                                             |       |   |   |
| Related party                      |       | 161                                              |       | 1,800 |   |
| Other                              |       | —                                           |       | 106 |   |
|                               |       | 161                                              |       | 1,906 |   |
| Consolidated  revenues             |       | $                                                | 623        |   | $ | 2,369 |   |
|                               |       |                                             |       |   |   |
| Operating loss:                    |       |                                             |       |   |   |
| Cable Solutions                    |       | $                                                | (5,605     | ) | $ | (2,690 | ) |
| Wireless  Solutions                |       | (1,266                                           | )          | (4,864 | ) |
|                               |       |                                             |       |   |   |
| Total  consolidated operating loss |       | (6,871                                           | )          | (7,554 | ) |
| Financial income                   |       | 244                                              |       | 155 |   |
| Financial  expenses                |       | (4,162                                           | )          | (424 | ) |
| Income taxes                       |       | (250                                             | )          | (157 | ) |
| Loss for the period                |       | $                                                | (11,039    | ) | $ | (7,980 | ) |

 

The following provides information on the Company’sassets:

|                                                    | ** ** | **March 31,**                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| ** **                                         | ** ** | ** **                                       | ** ** | ** **            | ** ** |
| Cash, cash equivalents  and short-term investments |       | $                                                | 31,154     |                  | $          | 18,688 |   |
| Restricted cash                                    |       | 5,000                                            |       | 5,000                 |       |
| Debt issuance costs,  net                          |       | 150                                              |       | 1,074                 |       |
| Cable Solutions                                    |       | 3,370                                            |       | 3,139                 |       |
| Wireless Solutions                                 |       | 3,224                                            |       | 4,248                 |       |
|                                               |       | $                                                | 42,898     |                  | $          | 32,149 |   |

 

|                                         | ** ** | **Three Months Ended  March 31,**           | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                   | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands of U.S. $)**           | ** ** |
| Expenditures for  long-lived assets:    |       |                                                       |       |   |   |
| Cable Solutions                         |       | $                                                          | 148        |   | $ | 17 |   |
| Wireless  Solutions                     |       | 58                                                         |       | 17 |   |
|                                    |       | $                                                          | 206        |   | $ | 34 |   |
|                                    |       |                                                       |       |   |   |
| Depreciation and amortization expenses: |       |                                                       |       |   |   |
| Cable Solutions                         |       | $         158 |       | $         115 |   |
| Wireless Solutions                      |       | 60                                                         |       | 114 |   |
|                                    |       | $         218 |       | $         229 |   |

 

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The following is a summary of operations withingeographic areas based on the location of the customers:

|                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **(In thousands of U.S. $)** | ** ** |
| Revenues from sales to  affiliated and unaffiliated customers in the: |       |                                             |       |   |   |
| Cable Solutions  segment:                                             |       |                                             |       |   |   |
| North America                                                         |       | $                                                | 462        |   | $ | 463 |   |
| Wireless Solutions  segment:                                          |       |                                             |       |   |   |
| North America,  related party                                         |       | 161                                              |       | 1,800 |   |
| North America                                                         |       | —                                           |       | 95 |   |
| Rest of the  world                                                    |       | —                                           |       | 11 |   |
|                                                                  |       | $                                                | 161        |   | $ | 1,906 |   |
|                                                                  |       |                                             |       |   |   |
|                                                                  |       | $                                                | 623        |   | $ | 2,369 |   |

 

|                              | ** ** | **March 31,**                               | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                   | ** ** | **(In thousands of U.S. $)** | ** ** |
| Property and equipment,  net |       |                                             |       |                  |       |
| Israel                       |       | $                                                | 1,020      |                  | $          | 1,008 |   |
| United States                |       | 642                                              |       | 668                   |       |
|                         |       | $                                                | 1,662      |                  | $          | 1,676 |   |

 

Sales to major customers out of total revenues are asfollows:

|                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Customer A                 |       | 72                                               | %          | 18 | % |
| Customer B (related party) |       | 26                                               | %          | 76 | % |

 

**11.          SubsequentEvent**

**Employmentof Davidi Gilo, the Company’s Chairman of the Board of Directors**

On April 5, 2007, the Company entered into an amendedand restated employment agreement with Davidi Gilo (the “2007 Gilo Agreement”),which replaces and supersedes his employment agreement executed in 2006.

Under the 2007 Gilo Agreement, Mr. Gilo will continueto serve as the Company’s Chairman of the board of directors (subject toapproval of the Company’s stockholders and until his successor is duly appointedand elected). The amendment has the same three-year term as his 2006 employmentagreement (beginning February 2006), with automatic renewals thereafter forterms of one year each, subject to termination upon prior notice by eitherparty. In exchange for 20 hours of services per week, Mr. Gilo will receive anannual base salary of $200,000, which will be reviewed on or before December31, 2007 and thereafter based on Mr. Gilo’s services and the Company’sfinancial results. Mr. Gilo is eligible to receive employee benefits availableto all employees, is eligible to participate in bonus plans that may be adoptedby the Company’s board of directors and will be entitled to an additionalannual bonus based on his and the Company’s performance each year as determinedby the Company’s board of directors or Compensation Committee.  Inaddition, Mr. Gilo is eligible for stock options that the Company may award,and he accrues 30 days of paid vacation for each 12 months of employment, up toa maximum of 60 days.

If the Company terminates his employment without “Cause”(as defined in the 2007 Gilo Agreement), all of Mr. Gilo’s unvested optionsvest immediately and Mr. Gilo will receive a severance payment equal to thegreater of (a) the full amount of compensation that Mr. Gilo could haveexpected under the 2007 Gilo Agreement (based on his total compensation (salaryand bonus) earned in 2007) through the end of the term; or (b) the full amountof compensation that Mr. Gilo could have expected under the 2007 Gilo Agreementfor 18 months (based on his total compensation (salary and bonus) earned in2007).

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If the Company terminates his employment without Causeafter the initial three-year term, all of Mr. Gilo’s unvested options shallimmediately and Mr. Gilo will receive a severance payment equal to the fullamount of the compensation that Mr. Gilo could have expected under the 2007Gilo Agreement for 18 months (based on his total compensation (salary andbonus) earned in 2007).

If the Companyterminates his employment  for Cause, Mr.Gilo will receive a severance payment equal to full amount of the compensationthat Mr. Gilo could have expected under the 2007 Gilo Agreement for threemonths (based on his total compensation (salary and bonus) earned in 2007).

If Mr. Gilovoluntarily terminates his employment, Mr. Gilo shall receive a severancepayment equal to the full amount of the compensation that Mr. Gilo could haveexpected under the 2007 Gilo Agreement for nine months (based on his totalcompensation (salary and bonus) earned in 2007).

 

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**Item 2.****                                   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

You should read this Management’s Discussion andAnalysis of Financial Condition and Results of Operations in conjunction withour condensed consolidated financial statements and accompanying notesappearing elsewhere in this Quarterly Report on Form 10-Q. The mattersaddressed in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations, with the exception of the historical informationpresented, contain forward-looking statements involving risks anduncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of certain factors,including those set forth in Item 1A below and elsewhere in this report.

## **Overview**

We provide cable and wireless broadband accesssolutions through two business segments: our “Cable Solutions” segment and our “WirelessSolutions” segment. Our primary focus is now on our Cable Solutions segment,and significantly all of our internal resources are focused on enhancing ourvisibility in and penetration of the cable market. The recent additions ofJames A. Chiddix as the new Vice Chairman of our board of directors andWayne H. Davis as our new Chief Executive Officer validate our efforts andincrease our visibility within the cable industry.

Our products are designed to address four markets:Cable, Telecommunication, Utility and Wireless Internet Service Providers (“WISP”).Although we are engaged to various degrees in these distinct markets, some ofour core technologies overlap with our respective solutions.

Our Cable Solutions segment includes products that areused to deliver telephony and data T1/E1 links to enterprise and cellularproviders over cable’s wireless HFC networks. Additionally, our “SpectrumOverlay” technology is used to expand cable operators’ typical HFC networkcapacity in the “last mile” by up to two times in the downstream and up to fourtimes in the upstream. Our Cable Solutions segment includes the results ofoperations of Xtend Networks Ltd., an Israeli privately-held company, andits wholly-owned, United States-based subsidiary, Xtend Networks Inc.(collectively, “Xtend”). We purchased all of the outstanding capital stock ofXtend on June 30, 2004 and consolidated its operations with our operationsbeginning July 1, 2004. For a discussion of our acquisition of Xtend, seenote 7 of our 2006 annual Consolidated Financial Statements.

Our Wireless Solutions segment includes products whichenable utilities and other network service providers to operate privatewireless networks for communications, monitoring and Supervisory Control AndData Acquisition of their geographically disbursed, remote assets.Additionally, it includes our WISP and telecommunications products whichaddress the needs of rural service providers to serve customers with wireless,high-speed data beyond the reach of traditional terrestrial networks.

On March 23, 2006, we closed the privateplacement of shares of common stock, a convertible note, a senior secured noteand warrants to purchase common stock with Goldman, Sachs & Co. inexchange for $25,000,000 (the “2006 Financing”). In the 2006 Financing weissued (a) 1,353,365 shares of our common stock, (b) a $10,000,00010% Convertible Note (the “2006 Convertible Note”), (c) a $7,500,000 9.5%Senior Secured Note (the “Senior Secured Note”), and (d) warrants topurchase 298,617 shares of our common stock, all of which were exercised in2006. Our net proceeds from the 2006 Financing were approximately $23,400,000.

On March 28, 2007, we closed the privateplacement of a convertible note with Goldman, Sachs & Co. in exchangefor $35,000,000 (the “2007 Convertible Note”), which included $17,500,000 ofnew funding and $17,500,000 of which we used to pay off the 2006 ConvertibleNote and Senior Secured Note delivered in the 2006 Financing. Our net proceedsfrom the 2007 Financing were approximately $17,350,000. See also note 7.

**Critical Accounting Principles**

The discussion and analysis of our financial conditionand results of operations is based upon our unaudited interim condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates, judgments andassumptions that affect the reported assets and liabilities, revenues andexpenses and related disclosure of contingent assets and liabilities at thedate of the financial statements. Actual results may differ from theseestimates, judgments and assumptions.

Our significant accounting principles are described inthe notes to our 2006 annual consolidated financial statements in the AnnualReport on Form 10-K for the year ended December 31, 2006. We determined thecritical principles by 

21

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consideringaccounting principles that involve the most complex or subjective decisions orassessments. We believe our most critical accounting principles include thefollowing:

***Revenue Recognition***

Wegenerate revenues from sales of our products. As of March 31, 2007, ourrevenues from services were not significant. Our products are off-the-shelfproducts, sold “as is,” without further adjustment or installation. Whenestablishing a relationship with a new customer, we also may sell theseproducts together as a package, in which case we typically ship products at thesame time to the customer.

Werecord revenues from our products when (a) persuasive evidence of anarrangement exists; (b) delivery has occurred and customer acceptancerequirements have been met, if any, and we have no additional obligations;(c) the price is fixed or determinable; and (d) collection of paymentis reasonably assured. Our standard sales terms generally do not includecustomer acceptance provisions. However, if there is a right of return,customer acceptance provision or uncertainty about customer acceptance, wedefer the associated revenue until we have evidence of customer acceptance.

EmergingIssues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with MultipleDeliverables,” addresses when and how an arrangement involving multipledeliverables should be divided into separate units of accounting. Our multipledeliverables arrangements are those arrangements with new customers in which wesell our products together as a package. Because we deliver these off-the-shelfproducts at the same time and the four revenue recognition criteria discussedabove are met at that time, the adoption of EITF No. 00-21 had no impacton our financial position and results of operations.

Werecognize revenues related to the exclusivity provisions contained in theequipment purchase agreement with Arcadian Networks, Inc. (“ANI”) described innote 4 of our 2006 annual Consolidated Financial Statements on a straightline basis, over the 10-year term of that agreement

***Inventory***

We regularly monitor inventory quantities on hand andrecord a provision for excess and obsolete inventory based primarily on ourestimated forecast of future product demand and production requirements.Although we make every effort to ensure the accuracy of our forecasts of futureproduct demand, any significant unanticipated changes in demand ortechnological developments would significantly impact the value of ourinventory and reported operating results. If actual market conditions aredifferent from our assumptions, additional provisions may be required. Ourestimate of future product demand may prove to be inaccurate, in which case wemay have understated or overstated the provision required for excess andobsolete inventory. If we later determine that our inventory is overvalued, wewould be required to recognize such costs in our costs of sales at the time ofsuch determination. If we later determine that our inventory is undervalued, wemay have overstated our costs of sales in previous periods and would berequired to recognize additional operating income only when the undervaluedinventory was sold.

We adopted the provisions of the Financial AccountingStandards Board (“FASB”) Statement No. 151, “Inventory Costs” (“FASB 151”),as of January 1, 2006, which did not have a material effect on ourfinancial statements. FASB 151 requires us to recognize abnormal idle facilityexpenses as current-period charges, and to allocate fixed production overheadcosts to inventory based on normal capacity of the production facility.

***Extinguishment ofDebt***

As noted above, in the 2007 Financing we repaid the2006 Convertible Note and Senior Secured Note. We accounted for this repaymentas “extinguishment of debt” under the Emerging Issues Task Force 96-19, “Debtor’sAccounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”).The 2007 Convertible Note was initially recorded at fair value, and that amountwas used to determine the debt extinguishment loss of $3,263,000 recognized asa result of $2,231,000 unamortized accretion and $1,032,000 unamortizedissuance expenses related to the 2006 Convertible Note and Senior Secured Note.

***Fair Value ofFinancial Instruments***

The fair value of the financial instruments includedin our working capital approximates carrying value. The Syntek Promissory Note,the Senior Secured Note and the 2006 Convertible Note delivered in the 2006Financing and the 2007 Convertible Note delivered in the 2007 Financing arepresented in the Balance Sheets as “Long-Term Liabilities,” at approximatelytheir estimated fair value.

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*** ***

***Debt Issuance Costs***

Costs incurred in the issuance of the 2007 ConvertibleNote included cash payments to legal advisors in the three months ended March31, 2007. Costs incurred in the issuance of the 2006 Convertible Note andSenior Secured Note to the Company’s financial advisor included warrants topurchase shares of the Company’s common stock and cash payments to legal andfinancial advisors in the year ended December 31, 2006. In the year endedDecember 31, 2006, the fair value of the warrants was determined based on theBlack-Scholes option-pricing model. Issuance cost are deferred and amortized asa component of interest expense over the period from issuance through the firstredemption date.

***Stock-Based Compensation***

Prior to January 1, 2006, we accounted foremployees’ stock-based compensation under the intrinsic value model inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and related interpretations. Inaccordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”),as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.”

Effective January 1, 2006, we adopted SFASNo. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”).SFAS 123 (R)supersedes APB 25 and related interpretations and amends SFAS No. 95, “Statementof Cash Flows.” SFAS 123 (R)requires that awards classified as equity awards be accounted for using thegrant-date fair value method. The fair value of stock options is determinedbased on the number of shares granted and the price of our common stock, anddetermined based on the Black-Scholes, Monte Carlo and the binomialoption-pricing models, net of estimated forfeitures. We estimated forfeituresbased on historical experience and anticipated future conditions. The MonteCarlo valuation model is used only for stock options granted to executives in2005 and 2006 if vesting is subject to market condition criteria.

In March 2005, the SEC issued Staff AccountingBulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 providessupplemental implementation guidance on SFAS 123 (R), includingguidance on valuation methods, inventory capitalization of stock-basedcompensation cost, income statement effects, disclosures and other issues. SAB107 requires stock-based compensation to be classified in the same expense lineitems as cash compensation. We applied the provisions of SAB 107 in ouradoption of SFAS 123 (R).In addition, we have reclassified stock-based compensation from prior periodsto correspond to current period presentation within the same operating expenseline items as cash compensation paid to employees.

We elected to recognize compensation cost for anoption granted with service conditions that have graded vesting schedules usingthe graded vesting attribution method.

We elected to adopt the modified prospectivetransition method permitted by SFAS 123(R). Under this transition method,we implemented SFAS 123(R) as of the first quarter of 2006 with norestatement of prior periods. The valuation provisions of SFAS 123 (R) apply to newawards and to awards modified, repurchased or cancelled after January 1,2006. Additionally, we recognize compensation cost over the remaining serviceperiod for the portion of awards for which the requisite service has not beenrendered using the grant-date fair value of those awards as calculated for proforma disclosure purposes under SFAS 123.

In November 2005, FASB issued Staff Position No.SFAS 123(R)-3, “Transition Election Related to Accounting for Tax Effectsof Share-Based Payment Awards” (“SFAS 123(R)-3”). We elected to adopt thealternative transition method provided in SFAS 123(R)-3 for calculating the taxeffects of stock-based compensation pursuant to SFAS 123(R). Thealternative transition method includes simplified methods to establish thebeginning balance of the additional paid-in capital pool related to the taxeffects of employee stock-based compensation, which is available to absorb taxdeficiencies recognized after adoption of SFAS 123(R).

As of January 1, 2006, the cumulative effect ofour adoption of SFAS 123(R) was not material.

We account  for equityinstruments issued to third party service providers (non-employees)  in accordance with the fair value based on anoption-pricing model, pursuant  to the guidance inEITF 96-18 “Accounting for Equity Instruments That  AreIssued to Other Than Employees for Acquiring, or in Conjunction with  Selling Goods or Services”. The fair value of theoptions granted is revalued  over the relatedservice periods and recognized over the vesting period, using the Black-Scholesmodel.

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Expense related tostock-based compensation is included in the following line items in theStatements of Operations:

 

|                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands of U.S. $)**                     | ** ** |
| Cost of revenues           |       | $18                                              |       | $14 |   |
| Research and development   |       | $130                                             |       | $217 |   |
| Sales and marketing        |       | $291                                             |       | $469 |   |
| General and administrative |       | $447                                             |       | $1,281 |   |

 

**RecentAccounting Pronouncements**

In December 2006,FASB issued Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”).EITF 00-19-2 specifies that the contingent obligation to make future paymentsor otherwise transfer consideration under a registration payment arrangementshould be separately recognized and measured in accordance withSFAS No. 5, “Accounting forContingencies.” EITF 00-19-2 is effective immediately for registrationpayment arrangements and the financial instruments subject to thosearrangements that are entered into or modified subsequent to December 21,2006. For registration payment arrangements and financial instruments subjectto those arrangements that were entered into prior to December 21, 2006,the guidance in EITF 00-19-2 is effective for fiscal years beginning afterDecember 15, 2006. We do not expect EITF 00-19-2 to have a materialimpact on our consolidated financial statements.

In February 2007,FASB issued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”). This standard permits companies to choose to measuremany financial assets and financial liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. This statement will be effective for us as applicablebeginning January 1, 2008. We are currently evaluating the impact that theadoption of SFAS 159 would have on our consolidated financial statements.

## **Results ofOperations**

***Revenues***

Revenuesdecreased to $623,000 in the three monthsended March 31, 2007 from $2,369,000 in the three months ended March 31, 2006.This decrease in revenues was primarily due to revenue of $161,000 compared torevenue of $1,800,000 from our Wireless Solutions segment for products sold toANI in the three months ended March 31, 2007 and 2006, respectively. ANI is arelated party as discussed above in note 3. Our sales for the Cable Solutionssegment were $462,000 and $463,000 for products sold to a top five cable MSO inthe three months ended March 31, 2007 and 2006, respectively.

Our revenue isconcentrated among relatively few customers, as set forth in the followingtable. Though our principal revenue-generating customers are likely to vary ona quarterly basis, we anticipate that our revenues will remain concentratedamong a few customers for the foreseeable future.

 

|                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Customer A                 |       | 72                                               | %          | 18 | % |
| Customer B (related party) |       | 26                                               | %          | 76 | % |

 

***Cost of Revenues***

Costof revenues consists of component and material costs, direct labor costs,warranty costs and overhead related to manufacturing our products.

Costof revenues decreased to $698,000 during the three months ended March 31, 2007from $1,810,000 during the three months ended March 31, 2006. This decrease incost of revenues was primarily attributable to decreases in shipments of ourproducts. Our gross margin during the three months ended March 31, 2007decreased primarily due to the decrease in shipment of our products togetherwith flat fixed costs. We anticipate that our gross margins will continue tofluctuate based on our product and customer mix, revenue level and inventoryvaluations.

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*** ***

***Research and Development***

Ourresearch and development expenses were $2,868,000 and $2,461,000 during thethree months ended March 31, 2007 and 2006, respectively. Approximately$2,206,000 and $1,135,000 of these expenses were from our Cable Solutionssegment and approximately $662,000 and $1,326,000 of these expenses were fromour Wireless Solutions segment for the three months ended March 31, 2007 and2006, respectively. These expenses consist primarily of personnel, facilities,equipment and supplies and are charged to operations as incurred. A majority ofour research and development activities are conducted in our facility inIsrael.

Theincrease in our research and development expenses in our Cable Solutionssegment during the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006 resulted mainly from (a) an increase in salariesand compensation from $613,000 to $1,226,000 due to the increase in our CableSolutions segment workforce compared to the workforce as of March 31, 2006 and(b) an increase of subcontractors, materials and other professional fees from$139,000 to $445,000.

Givenour focus on our Cable Solutions segment, we anticipate that we will need toincrease our research and development workforce in the Cable Solutions segmentin future periods to meet our customer demands.

Thedecrease in our research and development expenses in our Wireless Solutionssegment during the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006 resulted mainly from (a) a decrease in salaries andcompensation from $615,000 to $336,000 due to the decrease in our WirelessSolutions segment workforce compared to the workforce as of March 31, 2006, (b)a decrease of subcontractors, materials and other professional fees from$269,000 to $74,000 and (c) decreased charges for stock-based compensation from$118,000 to $17,000.

***Sales and Marketing***

Salesand marketing expenses decreased to $1,881,000 during the three months endedMarch 31, 2007 compared to $2,643,000 during the three months ended March 31,2006. Of these expenses, $1,724,000 and $1,561,000 were from our CableSolutions segment in the three months ended March 31, 2007 and 2006,respectively, and $157,000 and $1,082,000 were from our Wireless Solutionssegment in the three months ended March 31, 2007 and 2006, respectively. Salesand marketing expenses consist of salaries and related costs for sales andmarketing employees, consulting fees and expenses for travel, trade shows,market research, branding and promotional activities.

Theincrease in our sales and marketing expenses in our Cable Solutions segmentduring the three months ended March 31, 2007 compared to the three months endedMarch 31, 2006 resulted mainly from an increase in salaries and compensationfrom $775,000 to $982,000 due to the increase in our Cable Solutions segmentworkforce compared to the workforce as of March 31, 2006. These amounts werepartly offset by decreased charges for stock-based compensation from $328,000to $288,000.

Givenour focus on our Cable Solutions segment, we anticipate that our CableSolutions segment sales and marketing workforce will increase in future periodsas we increase our efforts to penetrate the Cable Solutions market and meet ourcustomer demands.

Thedecrease in our sales and marketing expenses from our Wireless Solutionssegment in the three months ended March 31, 2007 was mainly from (a) a decreasein salaries and compensation from $477,000 to $61,000 due to the decrease inour Wireless Solutions segment workforce compared to the workforce as of March31, 2006, (b) decreased charges for stock-based compensation from $141,000 to$3,000, (c) a decrease in travel and entertainment expenses from $65,000 to$22,000, (d) a decrease of subcontractors, materials and other professionalfees from $45,000 to $6,000 and (e) a decrease in overhead expenses from$245,000 to $43,000 related to the relocation of our sales and marketing supportfacilities of our Wireless Solutions segment from Palo Alto, California toNorcross, Georgia during 2006. Given this reduction and our general de-emphasisof our Wireless Solutions segment, we anticipate that sales and marketingexpenses of our Wireless Solutions segment will decrease in future periods.

***General and Administrative***

Generaland administrative expenses were $2,047,000 compared to $3,009,000 during thethree months ended March 31, 2007 and 2006, respectively. Of these expenses,approximately $1,520,000 and $285,000 were from our Cable Solutions segment andapproximately $527,000 and $2,724,000 were from our Wireless Solutions segmentduring the three months ended March 31, 2007 and 2006, respectively. Generaland administrative expenses consisted primarily of personnel and related costsfor general corporate functions, including finance, accounting, implementationof the Sarbanes-Oxley Act of 2002, strategic and business development andlegal.

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Thedecrease in general and administrative expenses during the three months endedMarch 31, 2007 compared to the three months ended March 31, 2006 was primarilydue to (a) decreased charges for stock-based compensation from $1,281,000to $447,000 and (b) a decrease in professional fees from $332,000 to $209,000.

Weexpect general and administrative expenses to be higher in the future as wecontinue to implement internal controls over financial reporting as required bythe Sarbanes-Oxley Act and to execute our strategic plans and businessdevelopment efforts.

***Financial Income (Expense), Net***

“FinancialIncome (expense), net” includes interest and investment income, foreigncurrency remeasurement gains and losses. Net interest expense was $3,918,000for the three months ended March 31, 2007 compared to net interest expense of$269,000 for the three months ended March 31, 2006. As a result of theextinguishment of the 2006 Convertible Note and Senior Secured Note, werecorded $3,263,000 in the three months ended March 31, 2007 as financialexpenses consisting of $2,231,000 of unamortized accretion and $1,032,000 ofunamortized issuance expenses. In addition we had increased interest expensesdue to our amended Syntek Promissory Note, 2006 Convertible Note and SeniorSecured Note. These increases were partially offset by interest income derivedmainly from our cash and short-term investment balances, and recognition of another-than-temporary impairment in our available-for-sale securities of $0 and($42,000) and realized losses of $0 and $31,000 for the three months endedMarch 31, 2007 and 2006, respectively.

Wewill incur increased interest expenses for the remainder of 2007 and beyond dueto long-term debt issued in the 2007 Financing in which the 2007 ConvertibleNote bears an annual interest rate of 5% and due to the amortization ofdeferred expenses incurred as part of the 2007 Financing. Interest expensesalso will increase given the accretion to the value of the $6,500,000 amendedSyntek Promissory Note. We will record accretion of $2,533,000 throughout theterm of the amended Syntek Promissory Note, unless the note is cancelled, ofwhich we recorded $323,000 during the three months ended March 31, 2007.

***Income Taxes***

As ofDecember 31, 2006, our Israeli subsidiaries had net operating losscarryforwards of approximately $96,000,000. These carryforwards have noexpiration date.

OurIsraeli subsidiaries have been granted “Approved Enterprise” status for severalinvestment programs. The Approved Enterprise status entitles these subsidiariesto receive tax exemption periods, ranging from two to six years, onundistributed earnings commencing in the year in which the subsidiaries attaintaxable income. In addition, this Approved Enterprise status provides a reducedcorporate tax rate of between 10% to 25% (as opposed to the usual Israelicorporate tax rate of 29% for 2007) for the remaining term of the program onthe plan’s proportionate share of income.

Sinceour Israeli subsidiaries have not achieved taxable income, the tax benefitsperiods have not yet commenced. The subsidiaries’ losses are expected to offsetcertain future earnings of the subsidiaries during the tax-exempt period;therefore, the utilization of the net operating losses will generate no taxbenefits. Accordingly, deferred tax assets from such losses have not beenincluded in our 2006 annual consolidated financial statements. The entitlementto the above benefits is conditioned upon the subsidiaries fulfilling theconditions stipulated by the law, regulations published thereunder and theinstruments of approval for the specific investments in approved enterprises.

**Liquidityand Capital Resources**

As ofMarch 31, 2007, we had $31,154,000 of cash, cash equivalents and short-terminvestments.

Ourconsolidated financial statements are presented on a going concern basis, whichcontemplates the realization of assets and satisfaction of liabilities in thenormal course of business. We have experienced significant losses fromoperations since our incorporation. For the period ended March 31, 2007, weincurred a net loss of $11,039,000 and had an accumulated deficit of$275,615,000. Our ability to continue as a going concern will depend upon ourability to raise additional capital or attain profitable operations. Inaddition, we continue to seek to expand our revenue base by adding newcustomers. Failure to secure additional capital or to expand our revenue baseto achieve profitability, would likely result in depleting our available fundsand not being able to pay our obligations when they become due. The accompanyingunaudited interim Consolidated Financial Statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result if we are unable to continue as a going concern.

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Duringthe three months ended March 31, 2007, net cash used in operations was$5,302,000, comprised mainly of our loss of $11,039,000, partially offset by(a) non-cash charges related to depreciation and amortization of $218,000,(b)  stock-based compensation of$886,000, (c) financing expenses of $3,715,000 resulting from accretion of theamended Syntek Promissory Note, the 2006 Convertible Note and Senior SecuredNote delivered in the 2006 Financing and the 2007 Convertible Note delivered inthe 2007 Financing, (d) an increase of liability for employee rights uponretirement of $234,000, and (e) changes in other working capital accounts of $688,000.

Duringthe three months ended March 31, 2006, net cash used in operations was$4,087,000, comprised mainly of our loss of $7,980,000, partially offset by (a)non-cash charges related to depreciation and amortization of $229,000, (b)financing expenses of  $365,000 resultingfrom accretion of the amended Syntek Promissory Note, 2006 Convertible Note andSenior Secured Note, (c) stock-based compensation of $1,981,000, (d) anincrease of liability for employee rights upon retirement of $301,000, and (e)changes in other working capital accounts of $1,017,000.

During the threemonths ended March 31, 2007, net cash provided by investing activities was$3,772,000 comprised of sales and maturities of our short-term investments netof $4,254,000 in purchases of short-term investments partially offset by$435,000 in purchases of property and equipment. During the three months endedMarch 31, 2006, net cash provided by investing activities was $3,674,000comprised of $3,739,000 net of sales and purchases of our short-terminvestments partially offset by $34,000 in purchases of property and equipment.

Financingactivities in the three months ended March 31, 2007 were approximately$18,248,000 related to the 2007 Financing which included the 2007 ConvertibleNote and proceeds we received upon the exercise of stock options.  Financing activities in the three monthsended March 31, 2006 were approximately $24,874,000 and related to (a) the 2006Financing, which included the issuance of our common stock, the 2006Convertible Note, the Senior Secured Note and warrants to purchase our commonstock, net of issuance cost and (b) proceeds we received upon the exercise ofstock options. See note 7 above for additional information about the 2007Financing and the 2006 Financing.

Wehave purchase obligations to our suppliers that support our operations in thenormal cause of our business. The obligations require us to purchase minimumquantities of the suppliers’ products at a specified price. As of March 31,2007 and December 31, 2006, we had approximately $2,929,000 and $1,136,000,respectively, of purchase obligations. These obligations are expected to becomepayable at various times through 2007.

**Subsequent Event**

**Employmentof Davidi Gilo, our Chairman of the Board of Directors**

On April 5, 2007, we entered into an amended andrestated employment agreement with Davidi Gilo (the “2007 Gilo Agreement”),which replaced and superseded his employment agreement executed in 2006.

Under the 2007 Gilo Agreement, Mr. Gilo will continueto serve as our Chairman of the board of directors (subject to approval of ourstockholders and until his successor is duly appointed and elected). The 2007Gilo Agreement has the same three-year term as his 2006 agreement, withautomatic renewals thereafter for terms of one year each, subject totermination upon prior notice by either party. In exchange for 20 hours ofservices per week, Mr. Gilo will receive an annual base salary of $200,000,which will be reviewed on or before December 31, 2007 and thereafter based onMr. Gilo’s services and our financial results. Mr. Gilo is eligible to receiveemployee benefits available to all employees, is eligible to participate inbonus plans that may be adopted by our board of directors and will be entitledto an additional annual bonus based on his and our performance each year asdetermined by our board of directors or Compensation Committee.  Inaddition, Mr. Gilo is eligible for stock options that we award, and he shallaccrue 30 days of paid vacation for each 12 months of employment.

If we terminatehis employment without “Cause” (as defined in the 2007 Gilo Agreement), all ofMr. Gilo’s unvested options will vest immediately and Mr. Gilo will receive aseverance payment equal to the greater of (a) the full amount of compensationthat Mr. Gilo could have expected under the 2007 Gilo Agreement (based on histotal compensation (salary and bonus) earned in 2007) through the end of theterm; or (b) the full amount of compensation that Mr. Gilo could have expectedunder the 2007 Gilo Agreement for 18 months (based on his total compensation(salary and bonus) earned in 2007).

If we terminatehis employment without Cause after the initial three-year term, all of Mr. Gilo’sunvested options will vest immediately and Mr. Gilo will receive a severancepayment equal to the full amount of the compensation that Mr. Gilo could haveexpected under the 2007 Gilo Agreement for 18 months (based on his totalcompensation (salary and bonus) earned in 2007).

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If we terminatehis employment for Cause, Mr. Gilo will receive a severance payment equal tofull amount of the compensation that Mr. Gilo could have expected under the2007 Gilo Agreement for three months (based on his total compensation (salaryand bonus) earned in 2007).

If Mr.Gilo voluntarily terminates his employment, Mr. Gilo will receive a severancepayment equal to the full amount of the compensation that Mr. Gilo could haveexpected under the 2007 Gilo Agreement for nine months (based on his totalcompensation (salary and bonus) earned in 2007).

**Forward-LookingStatements**

Youshould read Management’s Discussion and Analysis of Financial Condition andResults of Operations in conjunction with the consolidated financial statementsand accompanying notes appearing elsewhere in our Quarterly Report on Form10-Q. The matters addressed in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, with the exception of thehistorical information presented, contain forward-looking statements involvingrisks and uncertainties, as well as assumptions that, if they do not fullymaterialize or prove incorrect, could cause our business and results ofoperations to differ materially from those expressed or implied by suchforward-looking statements. Such forward-looking statements include:

·                  our belief that our ability to continue as a goingconcern will depend upon our ability to raise additional capital or attainprofitable operations;

·                  our belief that failure to secure additional capitalor to expand our revenue base to achieve profitability would likely result indepleting our available funds and not being able to pay our obligations whenthey become due;

·                  ourbelief that our most critical accounting policies include policies related torevenue recognition, inventory, extinguishment of debt, fair value of financialinstruments, debt issuance costs and stock-based compensation;

·                  our expectation that EITF 00-19-2 will not have amaterial impact on our consolidated financial statements;

·                  our anticipation that our revenues will remain concentratedamong a few customers for the foreseeable future;

·                  our anticipation that our gross margins willcontinue to fluctuate based on our product and customer mix, revenue level andinventory valuations;

·                  our anticipation that we will need to increase ourresearch and development workforce in the Cable Solutions segment in futureperiods to meet our customer demands;

·                  our anticipation that our Cable Solutions segmentsales and marketing workforce will increase in future periods as we increaseour efforts to penetrate the Cable Solutions market and meet our customerdemands;

·                  our anticipation that sales and marketing expensesof our Wireless Solutions segment will decrease in future periods given thereduction in our expenses related to the relocation of our sales and marketingsupport facilities from California to George and our general de-emphasis of ourWireless Solutions segment;

·                  our expectation that general and administrativeexpenses will be higher in the future as we continue to

·                  implement internal controls over financial reportingas required by the Sarbanes-Oxley Act of 2002 and to execute our strategicplans and business development efforts;

·                  our expectation that the losses of our Israelisubsidiaries will offset certain future earnings of the subsidiaries, ifattained, during the tax-exempt period (provided under Israeli law);and

·              our belief as to the payment of purchase obligationsthat are expected to become payable at various times through 2007.

Youcan identify these and other forward-looking statements by the use of wordssuch as “may,” “will,” “should,” “could,” “intend,” “expect,” “plan,” “estimate,”“project,” “anticipate,” “believe,” “potential,” “continue,” or the negative ofsuch terms, or other comparable terminology. The risks, uncertainties andassumptions referred to above that could cause our actual results to differmaterially from the results expressed or implied by such forward-lookingstatements include those set 

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forth under Item 1Abelow and the risks, uncertainties and assumptions discussed from time to timein our other public filings and public announcements. All forward-lookingstatements included in this document are based on information available to usas of the date hereof, and we assume no obligation to update theseforward-looking statements.

 

**Item 3.****            Quantitativeand Qualitative Disclosures about Market Risk**

***We are exposed to financial marketrisks including changes in interest rates and foreign currency exchange rates.Substantially all of our revenue and capital spending is transacted in UnitedStates dollars, although a substantial portion of the cost of our operations,relating mainly to our personnel and facilities in Israel, is incurred in NewIsraeli Shekels (“NIS”). We have not engaged in hedging transactions to reduceour exposure to fluctuations that may arise from changes in foreign exchangerates. In the event of an increase in inflation rates in Israel, or ifappreciation of the NIS occurs without a corresponding adjustment in ourdollar-denominated revenues, our results of operation and business could bematerially harmed.***

***As of March 31, 2007, we had cash,cash equivalents and short-term investments of $31,154,000. Substantially allof these amounts consisted of corporate and government fixed income securitiesand money market funds that invest in corporate and government fixed incomesecurities that are subject to interest rate risk. We place our investmentswith high credit quality issuers and by policy limit the amount of the creditexposure to any one issuer.***

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

***While all our cash equivalents andshort-term investments are classified as “available-for-sale,” we generallyhave the ability to hold our fixed income investments until maturity andtherefore we would not expect our operating results or cash flows to beaffected to any significant degree by the effect of a sudden change in marketinterest rates on our securities portfolio. We may not be able to obtainsimilar rates after maturity as a result of fluctuating interest rates. We donot hedge any interest rate exposures.***

**QuantitativeInterest Rate Disclosure as of March 31, 2007**

***If marketinterest rates were to increase on March 31, 2007 immediately and uniformly by10%, the fair value of the portfolio would decline by approximately $12,000, orapproximately 0.04% of the total portfolio (approximately 0.03% of totalassets). Assuming that the average yield to maturity on our portfolio at March31, 2007 remains constant throughout the second quarter of 2007 and assumingthat our cash, cash equivalents and short-term investments balances at March31, 2007 remain constant for the duration of the second quarter of 2007,interest income for the second quarter of 2007 would be approximately $326,000.Assuming a decline of 10% in the market interest rates at March 31, 2007,interest income for the second quarter of 2007 would be approximately $383,000,which represents a decrease in interest income of approximately $28,000. Thedecrease in interest income will result in a decrease of the same amount to netincome and cash flows from operating activities for the three months endedMarch 31, 2007. These amounts are determined by considering the impact of thehypothetical interest rates on our cash equivalents and available-for-salesecurities at March 31, 2007 over the remaining contractual lives.***

**Item 4.****            Controls andProcedures**

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of our disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) as of the end of the periodcovered by this report. Based on such evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of such period,our disclosure controls and procedures were effective to ensure thatinformation we are required to disclose in reports that we file under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission rules and forms.

There have not been anychanges in our internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during thefiscal quarter to which this report relates that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.****        OTHER INFORMATION**

**Item 1A.****         Risk Factors**

Our business is subject to substantial risks,including the risks described below.

**We havea history of significant losses, expect future losses and may never achieve orsustain profitability.**

We have incurredsignificant losses since our inception, and we expect to continue to incurlosses for the foreseeable future. We incurred losses of $11,039,000 for thethree months ended March 31, 2007 and as of that date our accumulateddeficit was $275,615,000. Our revenues and gross margins may not grow or evencontinue at their current levels and may decline even further. If our revenuesdo not rapidly increase, or if our expenses increase at a greater pace than ourrevenues, we will never become profitable.

**We havewritten down and may need to further write-down our inventory in the future ifour sales levels do not match our expectations, or if selling prices declinemore than we anticipate, which could adversely impact our operating results.**

We operate in anindustry that is characterized by intense competition, supply shortages oroversupply, rapid technological change, unpredictable sales patterns, decliningaverage selling prices and rapid product obsolescence, all of which make itmore challenging to effectively manage our inventory. In addition, some of thecomponents we require have long lead-times and we are required to order orbuild inventory well in advance of the time of our anticipated sales.

Our inventory isstated at the lower of cost or market value. Determining market value of ourinventory requires numerous judgments, including, but not limited to, judgmentsregarding average selling prices and sales volumes for future periods. Weprimarily utilize estimated selling prices for measuring any potential declinesin market value below cost. When market value is determined to be below cost,we make appropriate allowances to reduce the value of inventories to netrealized value. We may reduce the value of our inventory when we determine thatinventory is slow moving, obsolete, excessive or if the selling price of theproduct is insufficient to cover product costs and selling expenses.

In this regard,our inventory increased substantially in 2005 because sales were substantiallyless than our anticipated demand and we were required to make advance inventorypurchase commitments for anticipated sales. Accordingly, we recorded a writedown of inventory and non-cancelable purchase commitments of $424,000 and$2,050,000 for the years ended December 31, 2006 and 2005, respectively.

If our sales donot increase, the sales price of our products decrease or we are otherwiseunable to control inventory levels consistent with actual demand, we may berequired to write down additional inventory. Any such write-down wouldadversely affect our operating results in future periods.

**We mayhave insufficient capital to execute our business plan.**

On March 28,2007, we closed a financing of $35,000,000 with Goldman, Sachs & Co.,as further described in note 7. In the 2007 Financing, we delivered the 2007Convertible Note, $17,500,000 of which was used to payoff the outstanding 2006Convertible Note and the Senior Secured Note issued to Goldman,Sachs & Co. in the 2006 Financing. Following this pay off and paymentof issuance expenses , our net proceeds were $17,350,000. Notwithstanding the2007 Financing, we may need additional capital to execute our business plan. Ifwe are unsuccessful in securing additional cash, either through additionalequity and/or debt financings or increased revenues, we may not be able tosuccessfully execute our business plan.

**If wedefault under the 2007 Convertible Note delivered to Goldman, Sachs &Co., the principal and accrued interest would become due and payable whichwould substantially harm our cash position and business prospects.**

On March 28,2007, we closed the 2007 Financing which included delivery of the 2007Convertible Note in the principal amount of $35,000,000. The 2007 ConvertibleNote contains events of default that, if triggered, would require us to pay theprincipal and accrued interest under such note immediately (after theexpiration of applicable cure periods). If an event of default occurs under the2007 Convertible Note and the holder declares all outstanding principal and interestimmediately due and payable, our cash position and business prospects would besubstantially harmed.

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** **

**If wefail to achieve significant market penetration and customer acceptance of ourcable products, our prospects would be substantially harmed.**

The market forbroadband products in the cable industry is extremely competitive, subject todrastic technological changes, changes in capital expenditure budgets andhighly fragmented. Our products in the Cable Solutions segment are new andrelatively unknown; accordingly, we have not generated significant revenue inthis segment. We have only recently shipped our first commercial orders for our3GHz Spectrum Overlay solution to two systems of a top MSO. Other than theseorders, we have only begun to install our 3GHz Spectrum Overlay products withcustomers in field trials. There can be no assurance that our installations ofour cable products will be successful. As some of our cable products continueto be in a development stage, we may face challenges such as market resistanceto new products, perceptions regarding customer support and quality control.

We will generatesignificant sales only if we are able to penetrate the market and create marketshare in this industry. If we are unable to do so, our business would be harmedand our prospects significantly diminished.

**Becausesubstantially all of our revenues are generated in United States dollars whilea portion of our expenses are incurred in New Israeli Shekels, our results ofoperations could be seriously harmed if the rate of inflation in Israel exceedsthe rate of devaluation of the New Israeli Shekel against the United Statesdollar.**

Our functionalcurrency is the United States dollar. We generate substantially all of ourrevenues in United States. dollars, but we incur a substantial portion of ourexpenses, principally salaries and related personnel expenses related toresearch and development, in New Israeli Shekels (“NIS”). As a result, we areexposed to the risk that the rate of inflation in Israel will exceed the rateof devaluation of the NIS in relation to the dollar or that the timing of thisdevaluation lags behind inflation in Israel.

**Oursuccess will depend on future demand for additional bandwidth by MSOs and theircustomers and the willingness and ability of MSOs to substantially increaseavailable bandwidth on their networks using our alternative technologysolution.**

Because our cableproducts expand available bandwidth over existing infrastructure, demand forthese products depends on demand for additional bandwidth by MSOs and theircustomers. The scope and timing of customer demand for additional bandwidth isuncertain and hard to predict. The factors influencing this demand includecompetitive offerings, applications availability, pricing models, costs,regulatory requirements and the success of initial roll-outs.

For our cableproducts to be sold in significant quantities, MSOs also must be willing andable to substantially increase the available bandwidth on their networks. MSOsmay not be willing or able to develop additional services and revenue streamsto justify the deployment of our technology. If the future demand for bandwidthis insubstantial, is addressed by alternative technologies or does not developin the near future, our prospects would be adversely affected.

**We havenot yet produced or deployed our cable products in high volumes.**

We have not yetproduced our Spectrum Overlay solutions in high volumes and there may bechallenges and unexpected delays, such as quality control issues, in ourattempts to increase volume and lower production costs. Our long-term successdepends on our ability to produce high quality products at a low cost and, inparticular, to reduce the production cost of our cable products designed forresidential use.

Because we havenot yet deployed our Spectrum Overlay solutions in high volumes, there issignificant technology risk associated with any such future deployment. Wecannot be sure that any such high volume deployment would be successful.

**Ourfuture growth depends on market acceptance of several emerging broadbandservices, on the adoption of new broadband technologies and on several otherbroadband industry trends.**

Future demand forour broadband products will depend significantly on the growing marketacceptance of several emerging broadband services, including digital video,video-on-demand, high definition television, very high-speed data services andvoice-over-internet protocol (“VoIP”) telephony. The effective delivery ofthese services will depend in part on a variety of new network architectures,such as fiber-to-the premises networks, video compression standards such asMPEG-4 and Microsoft’s Windows Media 9, the greater use of protocols such as IPand the introduction of new consumer devices, such as advanced set-top boxesand digital video recorders. If adoption of these emerging services and/ortechnologies is not as widespread or as rapid as we expect, our net salesgrowth would be materially and adversely affected.

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Furthermore,other technological, industry and regulatory trends will affect the growth ofour business. These trends include the following:

·                                          convergence,or the desire of certain operators to provide a combination of video, voice anddata services to consumers, also known as the “triple play;”

·                                          theuse of digital video by businesses and governments;

·                                          theprivatization of state owned telecommunication companies in other countries;

·                                          effortsby regulators and governments in the United States and abroad to encourage theadoption of broadband and digital technologies; and

·                                          theextent and nature of regulatory attitudes toward such issues as competitionbetween operators, access by third parties to networks of other operators andnew services such as VoIP.

If, for instance,operators do not pursue the triple play as aggressively as we expect, our netsales growth would be materially and adversely affected. Similarly, if ourexpectations regarding these and other trends are not met, our net sales couldbe materially and adversely affected.

**We willneed to develop distribution channels to market and sell our cable products.**

Our SpectrumOverlay solutions are in the early stages of commercialization. We currentlyhave limited relationships with potential customers and distributors as well aslimited sales staff. We will be successful only if we are able to developdistribution channels to market and sell our cable products in sufficientvolumes.

To develop suchchannels and market and sell our cable products, we need to grow our sales andmarketing team, many of whom will be based in the United States. It may bedifficult for us to hire and retain additional qualified personnel. Integratingnew personnel, particularly United States based personnel, may be challengingfrom a culture and logistics perspective because most of our employeescurrently are based in Israel.

We currently havelimited exposure to global business opportunities, and will not be able to takeadvantage of meaningful potential global demand for our products unless anduntil we are able to develop meaningful global distribution channels andstrategies.

**Becauseof our long product development process and sales cycle, we may continue toincur substantial expenses without sufficient revenues that could cause ouroperating results to fluctuate.**

A customer’sdecision to purchase our products typically involves a significant technicalevaluation, formal internal procedures associated with capital expenditureapprovals and testing and acceptance of new systems that affect key operations.For these and other reasons, the sales cycle associated with our systems can belengthy and subject to a number of significant risks, over which we have littleor no control. Because of the growing sales cycle and the likelihood that wemay rely on a small number of customers for our revenues, our operating resultswould be seriously harmed if such revenues do not materialize when anticipated,or at all.

**Iftelecommunications service providers and systems integrators do not promote andpurchase our products, or if the telecommunications equipment market does notgrow, our business will be seriously harmed.**

Telecommunicationsservice providers continually evaluate alternative technologies, includingdigital subscriber line, fiber and cable. If service providers or systemsintegrators do not emphasize systems that include our products, choose toemphasize alternative technologies or promote systems of our competitors, ourbusiness would be seriously harmed.

Market conditionsremain difficult and capital spending plans are often constrained. It is likelythat further industry restructuring and consolidation will take place.Companies that have historically not had a large presence in the broadbandaccess equipment market have expanded their market share through mergers andacquisitions. The continued consolidation of our competitors could have asignificant negative impact on us. Further, our competitors may bundle theirproducts or incorporate functionality into existing products in a manner thatdiscourages users from purchasing our products or which may require us to lowerour selling prices resulting in lower gross margins.

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If thetelecommunications market, and in particular the market for broadband accessequipment, does not improve and grow, our business would be substantiallyharmed.

**If thecommunications, Internet and cable television industries do not grow and evolvein a manner favorable to our business strategy, our business may be seriouslyharmed.**

Our future successdepends upon the growth of the communications industry, the cable televisionindustry and, in particular, the Internet. These markets continue to evolverapidly because of advances in technology and changes in customer demand. Wecannot predict growth rates or future trends in technology development. It ispossible that cable operators, telecommunications companies or other suppliersof broadband services will decide to adopt alternative architectures ortechnologies that are incompatible with our current or future products. If weare unable to design, develop, manufacture and sell products that incorporateor are compatible with these new architectures or technologies, our businesswill suffer. Also, decisions by customers to adopt new technologies or productsare often delayed by extensive evaluation and qualifications processes and canresult in delays of current products.

In addition, thederegulation, privatization and economic globalization of the worldwidecommunications market, which resulted in increased competition and escalatingdemand for new technologies and services, may not continue in a mannerfavorable to us or our business strategies. In addition, the growth in demandfor Internet services and the resulting need for high-speed or enhancedcommunications products may not continue at its current rate or at all.

**The lossof one or more of our key customers would result in a loss of a significantamount of our revenues and adversely affect our business.**

A relatively small numberof customers account for a large percentage of our revenues, as set forth inthe table below:

 

|                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Customer A                 |       | 72                                | %          | 18 | % |
| Customer B (related party) |       | 26                                | %          | 76 | % |

 

We expect that wewill continue to depend on a limited number of customers for a substantialportion of our revenues in future periods. The loss of a major customer couldseriously harm our ability to sustain revenue levels, which would seriouslyharm our operating results.

In this regard,sales to Customer B in the year ended December 31, 2006 accounted for thevast majority of our sales during that year. This customer was formed in 2006and has a very limited history of operations, profitable or otherwise. If thiscustomer is not successful in operating its business, or if sales to thiscustomer are lower than our expectations, our business could be harmed. We havedesigned products for our Wireless Solutions segment to meet the specificationsof Customer B, based on that customer’s assessment of the utility sector.Sales in our Wireless Solutions segment could be adversely affected ifCustomer B has not accurately assessed the needs of the utility sector.

Notwithstandingthe foregoing, as sales to Customer B were made by our Wireless Solutionssegment, if this customer is not successful, the effect to us will be temperedgiven the refocus of our internal resources on our Cable Solutions segment. Inthis regard, we expect that a significant source of our revenues in the comingyears will be derived from our Cable Solutions segment rather than our WirelessSolutions segment.

**We maynot be able to successfully operate businesses that we may acquire, in acost-effective and non-disruptive manner and realize anticipated benefits.**

We may exploreinvestments in or acquisitions of other companies, products or technologies,including companies or technologies that are not complementary or related toour current solutions. We ultimately may be unsuccessful in operating and/orintegrating an acquired company’s personnel, operations, products andtechnologies into our business. These difficulties may disrupt our ongoingbusiness, divert the time and attention of our management and employees andincrease our expenses.

Moreover, theanticipated benefits of any acquisition may not be realized or may not berealized in the time period we expect. Future acquisitions could result indilutive issuances of equity securities, the incurrence of debt, contingentliabilities or amortization expenses related to goodwill and other identifiableintangible assets and the incurrence of large and immediate write-offs, any ofwhich could seriously harm our business. In addition, we could spendsignificant resources in searching for and investigating new businessopportunities, and ultimately may be unsuccessful in acquiring new businesses.

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** **

**Wedepend on cable and telecommunications industry capital spending for ourrevenue and any decrease or delay in such spending would adversely affect ourprospects.**

Demandfor our products will depend on the size and timing of capital expenditures bytelecommunications service providers and MSOs. These capital spending patternsare dependent upon factors including:

·              the availability of cash orfinancing;

·              budgetary issues;

·              regulation and/or deregulation ofthe telecommunications industry;

·              competitive pressures;

·              alternative technologies;

·              overall demand for broadbandservices, particularly relatively new services such as VoIP;

·              industry standards;

·              the pattern of increasingconsolidation in the industry; and

·              general consumer spending andoverall economic conditions.

If MSOs andtelecommunications service providers do not make significant capitalexpenditures, our prospects would be adversely affected.

**Ourparticipation or lack of participation in industry standards groups mayadversely affect our business.**

We do notparticipate in the standards process of the Cable TelevisionLaboratories, Inc., a cable industry consortium that establishes cabletechnology standards and administers compliance testing. In the future, we maydetermine to join or not join other standards or similar organizations. Ourmembership in these organizations could dilute our proprietary intellectualproperty rights in our products while our failure to participate in others couldjeopardize acceptance of any of our products that do not meet industrystandards.

**Productstandardization, as may result from initiatives of MSOs and the wirelessindustry could adversely affect our prospects.**

Productstandardization initiatives encouraged by MSOs and telecommunications companiesmay adversely affect revenues, gross margins and profits. In the past,standardization efforts by major MSOs have negatively impacted equipmentvendors by leading to equipment obsolescence, commoditization and reducedmargins. If our products do not comply with future standards, our prospectscould be adversely affected.

**Since wereduced our workforce in 2005, our research and development efforts couldcontinue to be harmed.**

We implemented acost reduction program in 2005 by reducing our workforce, which resulted in areduction of our workforce of approximately 16%. This reduction has had thelargest effect on our research and development activities. Our ability tofurther develop and market our products may be limited if we have notaccurately predicted the appropriate workforce requirements for our researchand development efforts. In this regard, we are currently experiencingdifficulty in hiring skilled research and development personnel in Israel. Ifthis difficulty continues in the foreseeable future, our research anddevelopment efforts would be harmed.

**Competitionmay result in lower average selling prices, and we may be unable to reduce ourcosts at offsetting rates, which may impair our ability to achieveprofitability.**

There has beensignificant price erosion in the broadband equipment field. We expect thatcontinued price competition among broadband access equipment and systemssuppliers will reduce our gross margins in the future. We anticipate that theaverage selling prices of broadband access systems will continue to decline asproduct technologies 

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mature. We may be unableto reduce our manufacturing costs in response to declining average per unitselling prices. Our competitors may be able to achieve greater economies ofscale and may be less vulnerable to the effects of price competition than weare. These declines in average selling prices will generally lead to declinesin gross margins and profitability for these systems. If we are unable to reduceour costs to offset declines in average selling prices, we may not be able toachieve or maintain profitability.

**Ourquarterly operating results fluctuate, which may cause our share price todecline.**

Ourquarterly operating results have varied significantly in the past and arelikely to vary significantly in the future. These variations result from anumber of factors, including:

·                                          theuncertain timing and level of market acceptance for our systems and theuncertain timing and extent of rollouts of broadband access equipment andsystems by the major service providers;

·                                          thefact that we often recognize a substantial proportion of our revenues in thelast few weeks of each quarter;

·                                          theability of our existing and potential direct customers to obtain financing forthe deployment of broadband access equipment and systems;

·                                          themix of products sold by us and the mix of sales channels through which they aresold;

·                                          reductionsin pricing by us or our competitors;

·                                          globaleconomic conditions;

·                                          theeffectiveness of our system integrator customers in marketing and selling theirnetwork systems equipment;

·                                          changesin the prices or delays in deliveries of the components we purchase or license;and

·                                          anyacquisitions or dispositions we may effect.

A delay in therecognition of revenue, even from one customer, could have a significantnegative impact on our results of operations for a given period. Also, becauseonly a small portion of our expenses vary with our revenues, if revenue levelsfor a quarter fall below our expectations, we would not be able to timelyadjust expenses accordingly, which would harm our operating results in thatperiod. We believe that period-to-period comparisons of our results ofoperations are not meaningful and should not be relied upon as indicators offuture performance. If our operating results fall below the expectations ofinvestors in future periods, our share price would likely decline.

**Becausewe operate in international markets, we are exposed to additional risks whichcould cause our international sales to decline and our foreign operations tosuffer.**

Ourresearch and development facilities are located in Israel. Our reliance oninternational sales, operations and suppliers exposes us to foreign politicaland economic risks, which may impair our ability to generate revenues. Theserisks include:

·              economic, inflation and politicalinstability;

·              terrorist acts, internationalconflicts and acts of war;

·              our international customers’ability to obtain financing to fund their deployments;

·              changes in regulatory requirementsand licensing frequencies to service providers;

·              import or export licensingrequirements and tariffs;

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·              labor shortages or stoppages;

·              trade restrictions and taxpolicies; and

·              limited protection of intellectualproperty rights.

Any of the foregoingdifficulties of conducting business internationally could seriously harm ourbusiness.

**Conditionsin Israel affect our operations and could limit our ability to produce and sellour systems.**

Our research anddevelopment and final testing and assembly facilities, a majority of ouremployees and some of our contract manufacturers are located in Israel.Political, economic and military conditions in Israel directly affect ouroperations. Since the establishment of the State of Israel in 1948, a number ofarmed conflicts have taken place between Israel and its Arab neighbors and astate of hostility, varying in degree and intensity, has led to security andeconomic problems for Israel. Hostilities within Israel have dramaticallyescalated in recent years, which could disrupt our operations. In addition, thewars in Iraq and Afghanistan and the current military and political presence ofthe United States or its allies in Iraq and Afghanistan could cause increasinginstability in the Middle East and further disrupt relations between Israel andits Arab neighbors. We could be adversely affected by any major hostilitiesinvolving Israel, the interruption or curtailment of trade between Israel andits trading partners, a significant increase in inflation or a significantdownturn in the economic or financial condition of Israel. Moreover, severalcountries still restrict business with Israel and with Israeli companies. Wecould be adversely affected by restrictive laws or policies directed towardsIsrael or Israeli businesses.

Our ChiefFinancial Officer, one of our directors and a majority of our employees arebased in Israel, and many of them are currently obligated to perform annualreserve duty and are subject to being called to active duty at any time underemergency circumstances. We cannot assess the full impact of these requirementson our workforce or business if conditions should change, and we cannot predictthe effect on us of any expansion or reduction of these obligations.

**Becausewe generally do not have contracts with our customers, our customers candiscontinue purchases of our systems at any time, which could adversely affectfuture revenues and operating results.**

We generally sellour broadband access equipment and systems based on individual purchase orders.Our customers generally are not obligated by agreements to purchase oursystems, and the agreements we have entered into, other than our agreement withANI, do not obligate our customers to purchase a minimum number of systems. Ourcustomers can generally cancel or reschedule orders on short notice anddiscontinue using our systems at any time. Further, having a successful fieldsystem trial does not necessarily mean that the customer will order large volumesof our systems. The reduction, delay or cancellation of orders from one or moreof our customers could seriously harm our operating results.

**Theeffects of regulatory actions could impact spectrum allocation and frequenciesworldwide and cause delays or otherwise negatively impact the growth anddevelopment of the broadband market, which would adversely affect our business.**

Countriesworldwide are considering or are in the process of allocating frequencies forwireless applications, but not all markets have done so. If the United Statesand/or other countries do not provide sufficient spectrum for wirelessapplications or reallocate spectrum in the wireless frequency bands for otherpurposes, our customers may delay or cancel deployments in broadband wireless,which could seriously harm our business. Further, if our customers are unableto obtain licenses or sufficient spectrum in the wireless frequency bands ourbusiness could be seriously harmed.

The cable industryis also heavily regulated and changes in the regulatory landscape may adverselyaffect our business. For example, cable operators are currently required tocarry a significant number of analog channels. A reduction or elimination ofthis requirement may free bandwidth for these operators and reduce thepotential market for our products.

**Competitionmay decrease our market share, net revenues and gross margins, which couldcause our stock price to decline.**

Themarket for broadband access equipment and systems is intensely competitive,rapidly evolving and subject to rapid technological change. The maincompetitive factors in our markets include:

·              productperformance, features and reliability;

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·              price;

·              stability;

·              scope of product line;

·              sales and distributioncapabilities;

·              technical service and support;

·              relationships, particularly thosewith system integrators and operators; and

·              industry standards.

Certain of ourcompetitors 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 changingopportunities, technologies and other developments. In addition, many of ourcompetitors have longer operating histories, greater name recognition, broaderproduct lines and established relationships with system integrators and serviceproviders. Our primary competitors are Scientific Atlanta (purchased by CiscoSystems, Inc. in 2006); Motorola, Inc.; BigBand Networks, Inc.;C-Cor Incorporated and Narad Networks, Inc. Most of these competitors haveexisting relationships with one or more of our prospective customers. In thecable industry, our cable offerings face competition from technologies such asdigital set-top boxes, high-end compression technologies and DVRs. For ourbroadband wireless offerings, we face competition from technologies such asdigital subscriber line, fiber and cable. Furthermore, the move toward openstandards may increase the number of operators who will offer new services,which in turn may increase the number of competitors and drive down the capitalexpenditures per subscriber deployed. We may not be able to competesuccessfully against our current and future competitors, and competitivepressures could seriously harm our business.

**If theadoption of broadband wireless technology continues to be limited, we will notbe able to sustain or expand our wireless business.**

Our future successin the wireless telecommunications market depends on high-speed wirelesscommunications products gaining market acceptance as a means to provide voiceand data communications services. Because these markets are relatively new andunproven, it is difficult to predict if these markets will ever develop, expandor be sufficiently large to sustain our business. Major service providers inthe United States have ceased, delayed or reduced their rollouts and mayfurther delay or reduce rollouts in the future. Our expectations with respectto a recovery, if any, in the telecommunications market, may not proveaccurate. In the event that service providers adopt technologies other than thewireless technologies that we offer or if they delay further their deploymentof high-speed wireless communication products, we will not be able to sustainor expand our business.

While we continueto operate our Wireless Solutions segment, our primary focus is now on ourCable Solutions segment. Accordingly, we may consider a variety of alternativesto Wireless Solutions segment, including the sale, divestiture, license orrestructuring of a substantial portion or all of our current wireless networktechnology or assets. If demand for products in our Wireless Solutions segmentincreases, we may not have sufficient products (either in terms of quantity ordifferent product lines) to address the needs of the wireless market due to insufficientproduction capabilities or research and development expertise.

**Hardwaredefects or firmware errors could increase our costs and impair the marketacceptance of our systems, which would adversely affect our future operatingresults.**

Our systemsoccasionally contain certain defects or errors. This may result either fromdefects in components supplied by third parties or from errors or defects inour firmware or hardware that we have not detected. We have in the pastexperienced, and may experience from time-to-time, defects in new or enhancedproducts and systems after shipments, or defects in deployed systems. Thiscould occur in connection with stability or other performance problems. Ourcustomers integrate our systems into their networks with components from othervendors. Accordingly, when problems occur in a network system, it may bedifficult to identify the component that caused the problem. Regardless of thesource of these defects or errors, we will need to divert the attention of ourengineering personnel from our product development efforts to address thedefect or error. We have incurred in the past and may again incur significantwarranty and repair costs related to defects or errors, and we also may besubject to liability claims for damages related to these defects or errors. Theoccurrence of defects or errors, whether caused by our systems or thecomponents of another vendor, may result in significant customer relationshipproblems and injury to our reputation and may impair the market acceptance ofour systems.

 

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**Wedepend on contract manufacturers and third party equipment and technologysuppliers, and these manufacturers and suppliers may be unable to fill ourorders or develop compatible, required technology on a timely basis, whichwould result in delays that could seriously harm our results of operations.**

We currently haverelationships with a limited number of contract manufacturers for themanufacturing of our products, substantially all of whom are located in Israeland Taiwan. These relationships may be terminated by either party with littleor no notice. If our manufacturers are unable or unwilling to continuemanufacturing our systems in required volumes, we would have to identifyqualified alternative manufacturers, which would result in delays causing ourresults of operations to suffer. Our limited experience with thesemanufacturers and lack of visibility as to the manufacturing capabilities ofthese companies if our volume requirements significantly increase does notprovide us with a reliable basis on which to project their ability to meetdelivery schedules, yield targets or costs. If we are required to findalternative manufacturing sources, we may not be able to satisfy our productionrequirements at acceptable prices and on a timely basis, if at all. Anysignificant interruption in supply would affect the allocation of systems tocustomers, which in turn could seriously harm our business. In addition, wecurrently have no formal written agreement with a manufacturer for our modemproducts. Our current inventory of modems is unlikely to fulfill anticipateddemand, and we will therefore be required to find a manufacturer in the nearfuture. Our inability to enter into an agreement with a manufacturer for ourmodems would harm our business.

                In addition to sales to systemintegrators, we also sell in some instances directly to service providers. Suchdirect sales require us to resell equipment to service providers manufacturedby third party suppliers and to integrate this equipment with the equipment wemanufacture. We are particularly dependent on third party radio suppliers inselling our 3.5GHz and other products. We currently have limited relationshipswith third party suppliers. If we are unable to establish meaningfulrelationships with suppliers, or if these suppliers are unable to provideequipment that meets the specifications of our customers on the deliveryschedules required by our customers, and at acceptable prices, our businesswould be substantially harmed.

Our SpectrumOverlay solutions are implemented over the HFC plant and, as such, theyinterface and integrate with existing products from multiple other vendors.Future offerings by these vendors may not be sufficiently compatible with ourSpectrum Overlay solutions. In addition, we depend on the continuous deliveryof components by various manufacturers of electronic connectors, filters,boards and transistors.

                Furthermore, we have producedcertain of our products only in limited quantities. If demand for theseproducts increases significantly, we will need to implement and addressadditional processes, procedures and activities necessary to support increasedproduction. If we are unable to do so, our business would be substantiallyharmed.

**Weobtain some of the components included in our solutions from a single source ora limited group of suppliers, and the loss of any of these suppliers couldcause production delays and a substantial loss of revenue.**

Wecurrently obtain key components from a limited number of suppliers. Some ofthese components, such as semiconductor components for our wireless hubs, areobtained from a single source supplier. We generally do not have long-termsupply contracts with our suppliers. These factors present us with thefollowing risks:

·                                    delaysin delivery or shortages in components could interrupt and delay manufacturingand result in cancellation of orders for our systems;

·                                      supplierscould increase component prices significantly and with immediate effect;

·                                    wemay not be able to develop alternative sources for system components, if or asrequired in the future;

·                                    supplierscould 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 inshipments, increased manufacturing costs and increased systems prices; and

·                                    wemay hold more inventory than is immediately required to compensate forpotential component shortages or discontinuation.

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

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**If we donot effectively manage our costs, our business could be substantially harmed.**

We have increasedcertain expenses to address new business opportunities in the Cable Solutionssegment, and we will need to continue to monitor closely our costs andexpenses. If the market for our cable solutions does not expand or takes longerto develop than we expect, we may need to further reduce our operations. Inaddition, our acquisition of Xtend has caused our costs to increase as we seekto develop business.

**Delaysand shortages in the supply of components from our suppliers and third partyvendors could reduce our revenues or increase our cost of revenues.**

Delays andshortages in the supply of components are typical in our industry. We haveexperienced minor delays and shortages on more than one occasion. In addition,if worldwide manufacturing capacity does not rise along with a rise in demand,our subcontract manufacturers could allocate available capacity to largercustomers or to customers that have long-term supply contracts in place.

Our inability toobtain adequate manufacturing capacity at acceptable prices, or any delay orinterruption in supply, could reduce our revenues or increase our cost ofrevenue and could seriously harm our business.

**Thirdparties may bring infringement claims against us that could harm our ability tosell our products and result in substantial liabilities.**

Thirdparties could assert, and it could be found, that our technologies infringetheir proprietary rights. We could incur substantial costs to defend anylitigation, and intellectual property litigation could force us to do one ormore of the following:

·              obtainlicenses to the infringing technology;

·              paysubstantial damages under applicable law;

·              ceasethe manufacture, use and sale of infringing products; or

·              expendsignificant resources to develop non-infringing technology.

Any infringementclaim or litigation against us could significantly harm our business, operatingresults and financial condition.

**If we donot adequately protect our intellectual property, we may not be able to competeand our ability to provide unique products may be compromised.**

Our successdepends in part on our ability to protect our proprietary technologies. We relyon a combination of patent, copyright and trademark laws, trade secrets andconfidentiality and other contractual provisions to establish and protect ourproprietary rights. Our pending or future patent applications may not beapproved and the claims covered by such applications may be reduced. If allowed,our patents may not be of sufficient scope or strength, and others mayindependently develop similar technologies or products. Litigation, which couldresult in substantial costs and diversion of our efforts, may also be necessaryto enforce any patents issued or licensed to us or to determine the scope andvalidity of third party proprietary rights. Any such litigation, regardless ofthe outcome, could be expensive and time consuming, and adverse determinationsin any such litigation could seriously harm our business.

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

We regularlyevaluate and seek to explore and develop derivative products relating to ourCable Solutions segment. We may not be able to secure all desired intellectualproperty protection relating to such derivative products. Furthermore, becauseof the rapid pace of change in the broadband industry, much of our business andmany of our products rely on technologies that evolve constantly and thiscontinuing uncertainty makes it difficult to forecast future demand for ourproducts.

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**Governmentregulation and industry standards may increase our costs of doing business,limit our potential markets or require changes to our business model andadversely affect our business.**

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

Some of ourproducts and technology are subject to export control laws and regulations. Weare subject to the risk that more stringent export control requirements couldbe imposed in the future on product classes that include products exported byus, which would result in additional compliance burdens and could impair theenforceability of our contract rights. We may not be able to renew our exportlicenses as necessary from time to time. In addition, we may be required toapply for additional licenses to cover modifications and enhancements to ourproducts. Any revocation or expiration of any requisite license, the failure toobtain a license for product modifications and enhancements, or more stringentexport control requirements could seriously harm our business.

**We areincurring additional costs and devoting more management resources to complywith increasing regulation of corporate governance and disclosure.**

The Sarbanes OxleyAct of 2002 and the resulting rules of the Nasdaq Stock Market will continue torequire changes in our corporate governance, public disclosure and compliancepractices. The scope of rules and regulations applicable to us has increasedand will continue to increase our legal and financial compliance costs.

As a publiccompany, our systems of internal controls over financial reporting are requiredto comply with the standards adopted by the Securities and Exchange Commission(“SEC”) and the Public Company Accounting Oversight Board (the “PCAOB”). Wewill be required to make our first annual certification on our internalcontrols over financial reporting in our annual report for the fiscal yearended December 30, 2007. In preparing for such certification, we areevaluating our internal controls for compliance with applicable SEC and PCAOBrequirements, and we may be required to design enhanced processes and controlsto address issues identified through this review. This could result insignificant delays and cost to us and require us to divert substantialresources, including management time, from other activities. We have commenceda review of our existing internal control structure and may need to hireadditional personnel. Although our review is not complete, we are taking stepsto improve our internal control structure by dedicating internal resources toanalyze and improve our internal controls, to be supplemented periodically withoutside consultants as needed. However, if we fail to achieve and maintain theadequacy of our internal controls, we may not be able to conclude that we haveeffective internal controls over financial reporting as of the end of ourfiscal year 2007. Moreover, although our management will continue to review andevaluate the effectiveness of our internal controls, we can give no assurancethat there will be no material weaknesses in our internal control overfinancial reporting. We may in the future have material weaknesses or othercontrol deficiencies in our internal control over financial reporting as aresult of our controls becoming inadequate due to changes in conditions, thedegree of compliance with our internal control policies and proceduresdeteriorating, or for other reasons. If we have significant deficiencies ormaterial weaknesses or other control deficiencies in our internal control overfinancial reporting, our ability to record, process, summarize and reportfinancial information within the time periods specified in the rules and formsof the SEC will be adversely affected. This failure could materially andadversely impact our business, our financial condition and the market value ofour securities.

These laws andregulations and perceived increased risk of liability could make it moredifficult for us to attract and retain qualified members of our board ofdirectors, particularly to serve on our audit committee, and qualifiedexecutive officers. We cannot estimate the timing or magnitude of additionalcosts we may incur as a result.

**Oursuccess depends significantly on Davidi Gilo, our Chairman of the Board, theloss of whom could seriously harm our business.**

Our future successdepends in large part on the continued services of our senior management andkey personnel. In particular, we significantly depend on the services of DavidiGilo, our Chairman of the Board and former Chief Executive Officer. We do notcarry key person life insurance on our senior management or key personnel. Anyloss of the services of Mr. Gilo or other members of senior management orother key personnel could seriously harm our business.

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**Recentregulations related to equity compensation could adversely affect earnings,affect our ability to raise capital and affect our ability to attract andretain key personnel.**

Since ourinception, we have used stock options as a fundamental component of ouremployee compensation packages. We believe that our stock option plans are animportant tool to link the long-term interests of stockholders and employees,especially executive management, and serve to motivate management to makedecisions that will, in the long run, give the best returns to stockholders.FASB has adopted changes to generally accepted accounting principals in theUnited States that require us to record a charge to earnings for employee stockoption grants, as well as other equity based awards. The change has negativelyimpacted our earnings and, if such impact is material in the future, couldaffect our ability to raise capital on acceptable terms. In addition,regulations implemented by the Nasdaq Stock Market requiring stockholderapproval for all stock option plans could make it more difficult for us togrant stock options to employees in the future. To the extent these newregulations make it more difficult or unacceptably expensive to grant stockoptions to employees, we may incur increased compensation costs, change ourequity compensation strategy or find it difficult to attract, retain andmotivate employees, each of which could materially and adversely affect ourbusiness.

**Thegovernment programs and benefits we receive require us to satisfy prescribedconditions. These programs and benefits may be terminated or reduced in thefuture, which would increase our costs and taxes and could seriously harm ourbusiness.**

Certain of ourcapital investments have been granted “approved enterprise” status underIsraeli law providing us with certain Israeli tax benefits. The benefitsavailable to an approved enterprise are conditioned upon the fulfillment ofconditions stipulated in applicable law and in the specific certificate ofapproval. If we fail to comply with these conditions, in whole or in part, wemay be required to pay additional taxes for the period in which we enjoyed thetax benefits and would likely be denied these benefits in the future. From timeto time, the government of Israel has considered reducing or eliminating thebenefits available under the approved enterprise program. These tax benefitsmay not be continued in the future at their current levels or at all. Thetermination or reduction of these benefits would increase our taxes and couldseriously harm our business. As of the date hereof, our Israeli subsidiarieshave accumulated loss carry forwards for Israeli tax purposes and thereforehave not enjoyed any tax benefits under current approved enterprise programs.

In the past, wehave received grants from the government of Israel for the financing of aportion of our research and development expenditures for previous products inIsrael. The regulations under which we received these grants restrict ourability to manufacture products or transfer technology outside of Israel forproducts developed with this technology. Furthermore, these grants may not beavailable to us in the future.

As ofApril 1, 2005, the government of Israel eliminated the ability ofcompanies to submit new applications for approved enterprise status. Thischange in the government policy may hinder us in the future with respect to anybenefits we may have received for new undertakings which would have beenentitled to “approved enterprise” status.

**We maylose our United States income tax net operating loss carryforwards if weexperience a significant change in ownership.**

The utilization ofnet operating loss carryforwards may be subject to substantial annuallimitations if there has been a significant “change in ownership.” Any “changein ownership,” as described in Section 382 of the Internal Revenue Code,may substantially limit our ability to utilize the net operating lossescarryforwards. As of December 31, 2006, we had United States federal netoperating loss carryforwards of approximately $55,100,000, which will expire inyears 2011 through 2026 and state net operating losses of approximately$40,200,000 which will expire in years 2008 through 2016.

**Amajority of our directors and certain officers have relationships with DavidiGilo and his affiliated companies that could be deemed to limit theirindependence.**

A majority of ourboard of directors, Lewis Broad, Neill Brownstein, Avraham Fischer, SamuelKaplan and Alan Zimmerman and certain of our officers, have had professionalrelationships with Davidi Gilo, our Chairman of the Board and former ChiefExecutive Officer, and his affiliated companies for several years. Thesemembers of our board of directors previously served on the boards of directorsof DSP Communications, Inc. and/or DSP Group, Inc., of whichMr. Gilo was formerly the controlling stockholder and the Chairman of theBoard. In addition, Avraham Fischer is a senior partner of the law firm ofFischer, Behar, Chen & Co., which represents us on matters relating toIsraeli law, is an investor and co-chief executive officer of an Israeliinvestor group in which Mr. Gilo was an investor until October 2005,and is co-chief executive officer and a director of Clal Industries andInvestments, Ltd., which has made a significant investment in ANI, arelated party of our company. However, the long-term relationships betweenthese directors and officers and Mr. Gilo and his affiliated companiescould be considered to limit their independence.

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**Becauseour management has the ability to control stockholder votes, the premium overmarket price that an acquirer might otherwise pay could be reduced and anymerger or takeover could be delayed.**

As ofMarch 31, 2007, our management collectively owned approximately 33.49% ofour outstanding common stock (based on the number of shares owned by theseindividuals and the number of shares issuable upon exercise of options within60 days of March 31, 2007).

As aresult, these stockholders, acting together, will be able to control theoutcome of all matters submitted for stockholder action, including:

·              electingmembers to our board of directors;

·                                           approvingsignificant change-in-control transactions;

·                                           determiningthe amount and timing of dividends paid to themselves and to our publicstockholders; and

·                                           controllingour management and operations.

This concentrationof ownership may have the effect of impeding a merger, consolidation, takeoveror other business consolidation involving us, or discouraging a potentialacquirer from making a tender offer for our shares. This concentration ofownership could also negatively affect our stock’s market price or decrease anypremium over market price that an acquirer might otherwise pay.

**We relyon a continuous power supply to conduct our operations, and any electrical ornatural resource crisis could disrupt our operations and increase our expenses.**

We rely on acontinuous power supply for manufacturing and to conduct our businessoperations. Interruptions in electrical power supplies occur around the worldfrom time to time. Meanwhile, prices of the resources, such as electrical powerand crude oil, upon which we ultimately rely, directly or indirectly, inrunning our business have been volatile. Power shortages could disrupt ourmanufacturing, information technology and business operations and those of manyof our suppliers, and could cause us to fail to meet production schedules andcommitments to customers and other third parties. Any disruption to ouroperations or those of our suppliers could result in damage to our current andprospective business relationships and could result in lost revenue andadditional expenses, thereby harming our business and operating results.

**Becausethe Nasdaq Global Market is likely to continue to experience extreme price andvolume fluctuations, the price of our stock may decline.**

Themarket price of our shares has been and likely will continue to be highlyvolatile and could be subject to wide fluctuations in response to numerousfactors, including the following:

·              actualor anticipated variations in our quarterly operating results or those of ourcompetitors;

·              announcementsby us or our competitors of new products or technological innovations;

·              introductionand adoption of new industry standards;

·              changesin financial estimates or recommendations by securities analysts;

·              changesin the market valuations of our competitors;

·              announcementsby us or our competitors of significant acquisitions or partnerships; and

·              salesof our common stock.

Many of thesefactors are beyond our control and may negatively impact the market price ofour common stock, regardless of our performance. In addition, the stock marketin general, and the market for technology and telecommunications relatedcompanies in particular, have been highly volatile. Our common stock may nottrade at the same levels compared to shares of other technology companies andshares of technology companies, in general, may not sustain their currentmarket prices.

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To date, thetrading volume in our common stock generally has been relatively low andsignificant price fluctuations can occur as a result. If the generally lowtrading volumes experienced to date continue, such price fluctuations couldcontinue in the future and the sale prices of our common stock could decline significantly.Investors may therefore have difficulty selling their shares.

In the past,securities class action litigation has often been brought against a companyfollowing periods of volatility in the market price of its securities. We couldbecome the target of similar litigation in the future. Securities litigationcould result in substantial costs and divert management’s attention andresources, which could seriously harm our business and operating results.

**Ifsecurities or industry analysts do not publish research or reports about ourbusiness, if they change their recommendations regarding our shares adverselyor if our operating results to not meet their expectations, the price of ourcommon stock could decline.**

The trading marketfor our common stock will be influenced by the research and reports thatindustry and securities analysts publish about us or our business. If theseanalysts fail to publish reports about us or if one or more of these analystscease coverage of our company or fail to publish reports on us regularly, wecould lose visibility in the financial markets, which in turn could cause theprice of our common stock to decline. Moreover, if one or more analysts whocover us downgrade our common stock or if our operating results do not meettheir expectations, the price of our common stock could decline.

**Provisionsof our governing documents and Delaware law could discourage acquisitionproposals or delay a change in control.**

OurFifth Amended and Restated Certificate of Incorporation and Amended andRestated Bylaws contain anti-takeover provisions that could make it moredifficult for a third party to acquire control of us, even if that change incontrol would be beneficial to stockholders. Specifically:

·                                          our board ofdirectors has the authority to issue common stock and preferred stock and todetermine the price, rights and preferences of any new series of preferredstock without stockholder approval;

·                                          our board ofdirectors is divided into three classes, each serving three-year terms;

·                                            supermajority voting is required to amend key provisions of our Fifth Amended andRestated Certificate of Incorporation and Amended and Restated Bylaws;

·                                            there arelimitations on who can call special meetings of stockholders;

·                                          stockholdersare not able to take action by written consent; and

·                                           advancenotice 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 maybe difficult to enforce a judgment in the United States against us and ournonresident Chief Financial Officer and certain directors.**

Our ChiefFinancial Officer and two of our directors are not residents of the UnitedStates, and a substantial portion of our assets and the assets of these personsare located outside the United States. Therefore, it may be difficult toenforce a judgment obtained in the United States based upon the civil orcriminal liabilities provisions of the United States federal securities lawsagainst us or any of those persons or to effect service of process upon thesepersons in the United States.

**Item 2.****            UnregisteredSales of Equity Securities and Use of Proceeds**

On March 28, 2007, we delivered the 2007 ConvertibleNote to Goldman, Sachs & Co. For a description of the 2007 Financing,including a description of our expenses paid in connection with the 2007Financing, see note 7 above. We relied upon Rule 506 of Regulation D and Section4(2) of the Securities Act of 1933, as amended, for the exemption fromregistration of the sale of such securities.

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**Item 6.****            Exhibits**
| Exhibit  Number | ** ** | **Exhibit Description** |
|-----------------|------------|-------------------------|
|            |       |                    |   |   |
|            | 3.1        |                    |   | Fifth Amended and Restated Certificate of  Incorporation. |
|            |       |                    |   |   |
|            | 3.2        |                    |   | Amended and Restated Bylaws. |
|            |       |                    |   |   |
|            | 4.1        |                    |   | Reference is made to Exhibits 3.1 and 3.2 above. |
|            |       |                    |   |   |
|            | 10.1       |                    |   | Form of Indemnification Agreement.* |
|            |       |                    |   |   |
|            | 31.1       |                    |   | Certificate of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|            |       |                    |   |   |
|            | 31.2       |                    |   | Certificate of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|            |       |                    |   |   |
|            | 32.1       |                    |   | Certificate of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

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* Indicates management contract or compensatory planor arrangement.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
| Date: May 15, 2007 |   |                                                       |
|--------------------|--------|------------------------------------------------------------|
|               |   |                                                       |   |   |
|               |   |                                                       |   |   |
| **VYYO INC.**      |   |                                                       |
|               |   |                                                       |   |   |
|               |   |                                                       |   |   |
| By:                |   | /s/ Wayne H. Davis                                         |   |   |
|               |   | Wayne H. Davis, Chief Executive Officer                    |   |   |
|               |   | (Duly Authorized Officer)                                  |   |   |
|               |   |                                                       |   |   |
|               |   |                                                       |   |   |
| By:                |   | /s/ Arik Levi                                              |   |   |
|               |   | Arik Levi, Chief Financial Officer                         |   |   |
|               |   | (Duly Authorized Officer and Principal Financial  Officer) |   |   |

 

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**EXHIBITINDEX**
| **Exhibit Number** | ** ** | **Exhibit** |
|--------------------|------------|-------------|
|               |       |        |   |   |
|               | 3.1        |        |   | Fifth Amended and Restated Certificate of  Incorporation. |
|               |       |        |   |   |
|               | 3.2        |        |   | Amended and Restated Bylaws. |
|               |       |        |   |   |
|               | 4.1        |        |   | Reference is made to Exhibits 3.1 and 3.2 above. |
|               |       |        |   |   |
|               | 10.1       |        |   | Form of Indemnification Agreement.* |
|               |       |        |   |   |
|               | 31.1       |        |   | Certificate of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|               |       |        |   |   |
|               | 31.2       |        |   | Certificate of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|               |       |        |   |   |
|               | 32.1       |        |   | Certificate of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adapted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

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*Indicates management contract or compensatory plan orarrangement.

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