##### Table of Contents

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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



(Mark One)



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



For the Quarterly Period Ended March 31, 2003



or



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



For the transition period from
 to



Commission File Number 0-30189



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VYYO INC.

(Exact name of registrant as specified in its charter)



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|Delaware                                                       |  | 94-3241270                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                              
|20400 Stevens Creek Boulevard, 8thFloor, Cupertino, California |  | 95014                                  
|(Address of Principal Executive Offices)                       |  | (Zip Code)                             



Registrants telephone number, including area code (408) 863-2300



---



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



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



As of May 5, 2003, there were 12,682,970 shares of Common Stock ($0.0001 par value) outstanding.



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##### Table of Contents

INDEX



VYYO INC.



|                              |  |                                                                                                      |  | Page No.
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------
|PART I. FINANCIAL INFORMATION |  |                                                                                                     
|                             
|Item 1.                       |  | Condensed Consolidated Financial Statements (Unaudited)                                              |  |         
|                             
|                              |  | Condensed consolidated balance sheetsMarch 31, 2003 and December 31, 2002                           |  | 3       
|                             
|                              |  | Condensed consolidated statements of operationsthree months ended March 31, 2003 and March 31, 2002 |  | 4       
|                             
|                              |  | Condensed consolidated statements of cash flowsthree months ended March 31, 2003 and March 31, 2002 |  | 5       
|                             
|                              |  | Notes to condensed consolidated financial statements                                                 |  | 6       
|                             
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 15      
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 34      
|                             
|Item 4.                       |  | Controls and Procedures                                                                              |  | 34      
|                             
|PART II. OTHER INFORMATION    |  |                                                                                                     
|                             
|Item 1.                       |  | Legal Proceedings                                                                                    |  | 35      
|                             
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                            |  | 35      
|                             
|Item 3.                       |  | Defaults upon Senior Securities                                                                      |  | 35      
|                             
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                  |  | 36      
|                             
|Item 5.                       |  | Other Information                                                                                    |  | 36      
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                     |  | 36      
|                             
|SIGNATURES.                   |  | 37                                                                                                  



2



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##### Table of Contents

Part I. Financial Information



Item 1. Condensed Consolidated Financial Statements



Vyyo Inc.



Condensed Consolidated Balance Sheets

(In Thousands)



|                                                                                                                                                                                                  |  | March 31, 2003 |          |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | -
|                                                                                                                                                                                                  |  | (Unaudited)    |          |   |                   |  
|Assets                                                                                                                                                                                            |  |                |          |   |                   |  
|CURRENT ASSETS:                                                                                                                                                                                   |  |                |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                                         |  | $              | 18,755   |   |                   | $
|Short-term investments                                                                                                                                                                            |  |                | 48,467   |   |                   |  
|Accounts receivable                                                                                                                                                                               |  |                | 231      |   |                   |  
|Inventories (note 2)                                                                                                                                                                              |  |                | 93       |   |                   |  
|Other                                                                                                                                                                                             |  |                | 480      |   |                   |  
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|Total current assets                                                                                                                                                                              |  |                | 68,026   |   |                   |  
|                                                                                                                                                                                                 
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                       |  |                | 1,292    |   |                   |  
|GOODWILL (note 3)                                                                                                                                                                                 |  |                | 420      |   |                   |  
|IDENTIFIABLE INTANGIBLE ASSETS (note 3)                                                                                                                                                           |  |                | 2,316    |   |                   |  
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|Total assets                                                                                                                                                                                      |  | $              | 72,054   |   |                   | $
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|Liabilities and stockholders equity                                                                                                                                                              |  |                |          |   |                   |  
|CURRENT LIABILITIES:                                                                                                                                                                              |  |                |          |   |                   |  
|Accounts payable                                                                                                                                                                                  |  | $              | 904      |   |                   | $
|Accrued liabilities (note 4)                                                                                                                                                                      |  |                | 5,327    |   |                   |  
|Accrued restructuring liability (note 4)                                                                                                                                                          |  |                | 261      |   |                   |  
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|Total current liabilities                                                                                                                                                                         |  |                | 6,492    |   |                   |  
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|CONTINGENCIES (note 5)                                                                                                                                                                            |  |                |          |   |                   |  
|                                                                                                                                                                                                 
|STOCKHOLDERS EQUITY:                                                                                                                                                                             |  |                |          |   |                   |  
|Common stock, $0.0001 par value and paid in capital; 200,000,000 shares authorized;
12,682,970 and 12,545,036 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively |  |                | 229,172  |   |                   |  
|Notes receivable from stockholders                                                                                                                                                                |  |                | (1,037   | ) |                   |  
|Accumulated other comprehensive income                                                                                                                                                            |  |                | 314      |   |                   |  
|Accumulated deficit                                                                                                                                                                               |  |                | (162,887 | ) |                   |  
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|Total stockholders equity                                                                                                                                                                        |  |                | 65,562   |   |                   |  
|                                                                                                                                                                                                  |  |                |          |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                                        |  | $              | 72,054   |   |                   | $
|                                                                                                                                                                                                  |  |                |          |   |                   |  



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



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##### Table of Contents

Vyyo Inc.



Condensed Consolidated Statements of Operations

(In Thousands Except Per Share Data)

(Unaudited)



|                                                                    |  | Three Months Ended March 31, |       
|------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                    |  | 2003                         |       
|NET REVENUES (note 8)                                               |  |                              |       
|Fixed broadband wireless                                            |  | $                            | 346   
|Software products                                                   |  |                              | 139   
|                                                                    |  |                              |       
|Total Net Revenues                                                  |  |                              | 485   
|                                                                    |  |                              |       
|COST OF REVENUES                                                    |  |                              |       
|Fixed broadband wireless                                            |  |                              | 86    
|Software products(1)                                                |  |                              | 284   
|                                                                    |  |                              |       
|Total Cost of Revenues                                              |  |                              | 370   
|                                                                    |  |                              |       
|GROSS PROFIT                                                        |  |                              | 115   
|                                                                    |  |                              |       
|OPERATING EXPENSES:                                                 |  |                              |       
|Research and development, net                                       |  |                              | 1,243 
|Selling and marketing                                               |  |                              | 1,263 
|General and administrative                                          |  |                              | 1,291 
|Charge for restructuring                                            |  |                              |       
|                                                                    |  |                              |       
|Total operating expenses                                            |  |                              | 3,797 
|                                                                    |  |                              |       
|OPERATING LOSS                                                      |  |                              | (3,682
|INTEREST INCOME, net                                                |  |                              | 419   
|                                                                    |  |                              |       
|NET LOSS                                                            |  | $                            | (3,263
|                                                                    |  |                              |       
|NET LOSS PER COMMON SHARE                                          |  |                              |       
|Basic and diluted(2)                                                |  | $                            | (0.26 
|                                                                    |  |                              |       
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING(IN
THOUSANDS) |  |                              |       
|Basic and diluted(2)                                                |  |                              | 12,649
|                                                                    |  |                              |       

---

|(1) |  | In 2003, includes amortization of identifiable intangible assets of $258,000 from acquisition of Shira (see note 3)
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(2) |  | Net loss per share and weighted average number of common shares have been adjusted to reflect the 1-for-3 reverse stock split (see note 1).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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



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Vyyo Inc.



Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



|                                                                            |  | Three Months Ended March 31, |        
|--------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                            |  | 2003                         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                              |        
|Net loss                                                                    |  | $                            | (3,263 
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                              |        
|Depreciation and amortization                                               |  |                              | 434    
|Amortization and charge related to stock compensation                       |  |                              |        
|Capital gain on sale of fixed assets                                        |  |                              | (1     
|Changes in assets and liabilities:                                          |  |                              |        
|Accounts receivable                                                         |  |                              | 66     
|Other current assets                                                        |  |                              | 57     
|Inventories                                                                 |  |                              | (14    
|Accounts payable                                                            |  |                              | (61    
|Accrued liabilities                                                         |  |                              | (461   
|Restructuring liabilities                                                   |  |                              | (1,853 
|                                                                            |  |                              |        
|Net cash used in operating activities                                       |  |                              | (5,096 
|                                                                            |  |                              |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                              |        
|Purchase of property and equipment                                          |  |                              | (54    
|Proceeds from sale of property and equipment                                |  |                              | 1      
|Purchase of short-term investments                                          |  |                              | (14,844
|Proceeds from sales and maturities of short-term investments                |  |                              | 23,620 
|                                                                            |  |                              |        
|Net cash provided by investing activities                                   |  |                              | 8,723  
|                                                                            |  |                              |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |  |                              |        
|Issuance of common stock                                                    |  |                              | 57     
|                                                                            |  |                              |        
|Increase in cash and cash equivalents                                       |  |                              | 3,684  
|Cash and cash equivalents at beginning of year                              |  |                              | 15,071 
|                                                                            |  |                              |        
|Cash and cash equivalents at end of period                                  |  | $                            | 18,755 
|                                                                            |  |                              |        
|Non-cash financing activities:                                              |  |                              |        
|Issuance of common stock for notes receivable                               |  |                              |        
|                                                                            |  |                              |        



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



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements

(Unaudited)



|1. |  | Basis of Presentation
|-- |  | ---------------------



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



Organization and Principles of Consolidation



Vyyo Inc. together with its subsidiaries (collectively, Vyyo or the
Company) have two operating segments: Fixed broadband wireless and, as of July 1, 2002, Software Products (as defined in note 3 below).



The Companys consolidated financial statements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries.
Following the acquisition of Shira, the Companys results of operations consolidate the results of Shiras operations commencing on July 1, 2002 (see note 3). All material intercompany balances and transactions have been eliminated in
consolidation.



Accounting Principles



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



Reverse Stock Split



On July 15, 2002, the Board of Directors approved a one-for-three reverse split of the outstanding shares of common stock,
which was effective on August 1, 2002. Issued and outstanding shares and per share amounts in the accompanying unaudited financial statements have been restated to give effect to the reverse stock split.



Use of Estimates



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



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





Inventory



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



During the year 2001, the Company recognized
a write-down of excess inventory and purchase commitments of $8.45 million. The write-down was charged to the cost of revenues. In the three months ended March 31, 2003, inventory that was previously written-down to $0 by taking a charge of $221,000
was sold for the amount of $135,000. In the three months ended March 31, 2002, inventory that was previously written-down to $0 by taking a charge of $197,000 was sold for the amount of $205,000.



Revenue Recognition



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



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



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



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



Loss per share



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



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





Employee Stock Based Compensation



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



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



Pro forma information regarding net loss required under SFAS No. 148 has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS No. 123. The pro forma net loss per share below reflects both (i) the charge for stock included in the historical net loss and (ii) the expense allocation based on the SFAS No. 123
calculation. The fair value for stock options was estimated at the date of each option grant using the Black-Scholes option pricing model with the following weighted-average assumptions for three months ended March 31, 2003 and 2002: risk-free
interest rates ranging from 1.19% to 5.52%; dividend yields of zero; a weighted-average expected life of the option of approximately 3.62 and 3.74 years; and volatility ranging from 0.36 to 0.71.



The Companys pro forma information is
as follows:



|                                                                                                 |  | Three Months ended March 31,         |       
|------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ------
|                                                                                                 |  | 2003                                 |       
|                                                                                                 |  | In thousands (except per share data) |       
|Net loss, as reported                                                                            |  | $                                    | (3,263
|Deduct: stock based employee compensation expense, included in reported net
loss                 |  |                                      |       
|Add: stock based employee compensation expense determined under fair value method for
all awards |  |                                      | (83   
|                                                                                                 |  |                                      |       
|Pro forma net loss                                                                               |  | $                                    | (3,346
|                                                                                                 |  |                                      |       
|Basic and diluted loss per share:                                                                |  |                                      |       
|As reported                                                                                      |  | $                                    | (0.26 
|                                                                                                 |  |                                      |       
|Proforma                                                                                         |  | $                                    | (0.26 
|                                                                                                 |  |                                      |       



Reclassifications



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



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)







|2. |  | Inventories
|-- |  | -----------



Inventory is comprised of the following:



|                |  | March 31, 2003 |    | December 31, 2002
|--------------- |  | -------------- | -- | -----------------
|                |  | In thousands  
|Raw materials   |  | $              | 30 |                  
|Work in process |  |                | 4  |                  
|Finished goods  |  |                | 59 |                  
|                |  |                |    |                  
|                |  | $              | 93 |                  
|                |  |                |    |                  



|3. |  | Acquisition of Shira
|-- |  | --------------------



On May 14, 2002, the Company entered into a Share Exchange Agreement with Shira, an Israeli privately held company that
provides software products for the prepress and publishing markets (Software Products), and certain of the shareholders of Shira, pursuant to which the Company acquired all of the outstanding ordinary shares of Shira. The results of
Shiras operations are consolidated from July 1, 2002.



The acquisition was accounted for using the purchase method under SFAS No. 141. The purchase price was allocated to those assets acquired and liabilities assumed based on the estimated fair value of
those assets and liabilities as of June 30, 2002 (acquisition date). Identifiable intangible assets consist of acquired technology in the amount of $2,743,000 and customer list in the amount of $348,000. Goodwill represents the excess of
the purchase price over the fair-value of the net tangible and identifiable intangible assets acquired. In accordance with SFAS No. 142, goodwill, which is related to Software Products, is not amortized and is tested for impairment annually.



Identifiable intangible assets
are amortized over a period of three years. Amortization of identifiable intangible assets acquired for the three months ended March 31, 2003 was $258,000, of which the amortization of acquired technology was $228,000 and customer list was $30,000.
The amortization of identifiable intangible assets acquired is included in the cost of revenues. The accumulated amortization of acquired technology as of March 31, 2003 was $775,000 of which the accumulated amortization of acquired technology was
$685,000 and customer list was $90,000.



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





|3. |  | Acquisition of Shira (continued)
|-- |  | --------------------------------



Future amortization expenses of identifiable intangible assets on a fiscal year basis are as follows:



|     |  | March 31, 2003
|---- |  | --------------
|     |  | In thousands  
|2003 |  | $             
|2004 |  |               
|2005 |  |               
|     |  |               
|     |  | $             
|     |  |               



The following unaudited pro forma combined information presents a summary of the results of the operations of the Company and Shira as if the acquisition had occurred at January 1, 2002. The pro forma financial information is not
necessarily indicative of the combined results that would have been attained had the acquisition taken place at the beginning of 2002, nor is it necessarily indicative of future results.



|                                                                        |  | Three Months endedMarch 31, 2002       |       
|----------------------------------------------------------------------- |  | -------------------------------------- | ------
|                                                                        |  | In thousands except, per share amounts |       
|Net revenues                                                            |  | $                                      | 1,890 
|                                                                        |  |                                        |       
|Operating loss                                                          |  | $                                      | (3,245
|                                                                        |  |                                        |       
|Net Loss                                                                |  | $                                      | (2,392
|                                                                        |  |                                        |       
|Net loss per shareBasic and diluted                                    |  | $                                      | (0.19 
|                                                                        |  |                                        |       
|Weighted average number of common shares outstandingBasic and
diluted* |  |                                        | 12,403
|                                                                        |  |                                        |       



| |  | 
| |  | 

| | * |  | Net loss per share and weighted average number of common shares have been adjusted to reflect the 1-for-3 reverse stock split (see note 1).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





|4. |  | Current Liabilities
|-- |  | -------------------



Accrued liabilities consist of the following:



|                          |  | March 31, 2003 |       | December 31, 2002
|------------------------- |  | -------------- | ----- | -----------------
|                          |  | In thousands  
|Compensation and benefits |  | $              | 1,690 |                  
|Withholding tax           |  |                | 1,525 |                  
|Royalties                 |  |                | 950   |                  
|Warranty*                 |  |                | 359   |                  
|Other                     |  |                | 803   |                  
|                          |  |                |       |                  
|                          |  | $              | 5,327 |                  
|                          |  |                |       |                  



|
|

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



|                                                         |  | Three Months Ended March 31, 2003 |     |   | Year Ended December 31, 2002 |  
|-------------------------------------------------------- |  | --------------------------------- | --- | - | ---------------------------- | -
|                                                         |  | In thousands                      |    
|Balance at beginning of period                           |  | $                                 | 395 |   |                              | $
|Liability acquired upon Shira acquisition                |  |                                   |     |   |                              |  
|Payments made under the warranty                         |  |                                   |     |   |                              |  
|Product warranty issued for new sales                    |  |                                   | 22  |   |                              |  
|Changes in accrual in respect of warranty periods ending |  |                                   | (58 | ) |                              |  
|                                                         |  |                                   |     |   |                              |  
|Balance at end the of period                             |  | $                                 | 359 |   |                              | $
|                                                         |  |                                   |     |   |                              |  



Accrued restructuring liability



In 2001, the Company implemented a restructuring program to reduce operating expenses. The Company recorded charges of $12.8 million, related to excess facilities, abandoned equipment and employees severance and other
related benefits due to a reduction of approximately 180 employees, or approximately 75% of the Companys workforce. In the three months ended March 31, 2003, the Company utilized $1.9 million from the restructuring expenses. The remaining
restructuring liability balance to be utilized relates to the Companys anticipated loss under a noncancelable lease agreement until it expires at the end of 2003.



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





|5. |  | Contingencies
|-- |  | -------------



Patent matter



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



Legal Claims regarding breach of leasing agreements



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



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



Former employees claims



The Company is involved in litigation
procedures with former employees in a total amount of approximately $57,000. The Companys management believes that the provision included in the financial statements as of March 31, 2003 is sufficient to cover the Companys exposure
deriving from these claims.



|6. |  | Former Chief executive officer (former CEO) separation agreement
|-- |  | ------------------------------------------------------------------



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



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





|7. |  | Comprehensive Loss
|-- |  | ------------------



The components of comprehensive loss are as follows:



|                                                 |  | Three Months Ended March 31, |       
|------------------------------------------------ |  | ---------------------------- | ------
|                                                 |  | 2003                         |       
|                                                 |  | In thousands                 |       
|Net loss                                         |  | $                            | (3,263
|Unrealized loss on available-for-sale securities |  |                              | (1    
|                                                 |  |                              |       
|Comprehensive loss                               |  | $                            | (3,264
|                                                 |  |                              |       



|8. |  | Segment Reporting
|-- |  | -----------------



Following the acquisition of Shira, as described in note 3 above, the Companys business is divided into two
segments: Fixed broadband wireless and Software Products. The Company evaluates performance and allocates resources based on profit or loss from operations before interest and other income, net.



|                                  |  | Three Months Ended March 31, |       
|--------------------------------- |  | ---------------------------- | ------
|                                  |  | 2003                         |       
|                                  |  | In thousands                 |       
|Net revenues:                     |  |                              |       
|Fixed broadband wireless          |  | $                            | 346   
|Software Products                 |  |                              | 139   
|                                  |  |                              |       
|Consolidated net revenues         |  | $                            | 485   
|                                  |  |                              |       
|Loss from operations:             |  |                              |       
|                                 
|Fixed broadband wireless          |  | $                            | (2,399
|Software Products                 |  |                              | (1,283
|                                  |  |                              |       
|Consolidated loss from operations |  |                              | (3,682
|                                 
|Interest income, net              |  |                              | 419   
|                                  |  |                              |       
|Net loss                          |  | $                            | (3,263
|                                  |  |                              |       



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Vyyo Inc.



Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)





|8. |  | Segment Reporting (continued)
|-- |  | -----------------------------



|                                       |  | March 31, 2003 |        | December 31, 2002
|-------------------------------------- |  | -------------- | ------ | -----------------
|                                       |  | In thousands  
|Identifiable assets:                   |  |                |        |                  
|Fixed broadband wireless               |  | $              | 68,623 |                  
|Software Products (including goodwill) |  |                | 3,431  |                  
|                                       |  |                |        |                  
|Consolidated identifiable assets:      |  | $              | 72,054 |                  
|                                       |  |                |        |                  



Sales to major customers:



|              |  | Three Months Ended March 31, |  
|------------- |  | ---------------------------- | -
|              |  | 2003                         |  
|Net revenues: |  |                              |  
|             
|Customer A    |  | 35                           | %
|Customer B    |  | 11                           | %
|Customer C    |  | 11                           | %
|Customer D    |  |                              |  



|9. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------



In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the guarantee. It also elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued and to
be made in regard of product warranties. Disclosures required under FIN 45 are included in these financial statements. The initial recognition and initial measurement provisions of this FIN are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. FIN 45 had no material effect on the Companys interim consolidated financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation of Variable Interest Entities (FIN
46). Under FIN 46, entities are separated into two populations: (1) those for which voting interests are used to determine consolidation (this is the most common situation) and (2) those for which variable interests are used to determine
consolidation. FIN 46 explains how to identify Variable Interest Entities (VIE) and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated
financial statements. FIN 46 is effective as follows: for variable interests in variable interest entities created after January 31, 2003, FIN 46 shall apply immediately, for variable interests in variable interest entities created before that date,
FIN 46 shall applyfor public entitiesas of the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its consolidated
financial statements.



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



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



Overview



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



While we are continuing to operate our traditional wireless business, we are also actively exploring a variety of alternatives to this business, including the sale, divestiture, license or restructuring of a substantial portion or
all of our current fixed wireless broadband technology or assets. In the event of any such transaction, the value we may realize in the current market could be minimal. In addition to our acquisition in July 2002 of Shira Computers Ltd.
(Shira), a provider of software products for the prepress and publishing markets, we also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. We have
invested, and we expect that we will continue to invest, significant time and resources searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.



We supply broadband wireless access systems used
by telecommunications service providers to deliver wireless, high-speed data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our systems as part of
their end-to-end network solutions for service providers. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $3.3 million for the
three months ended March 31, 2003. As of March 31, 2003, our accumulated deficit was approximately $162.9 million.



On May 14, 2002, Vyyo entered into a Share Exchange Agreement with Shira, an Israeli privately held company that provides software
products for the prepress and publishing markets. This transaction allows Vyyo to diversify its business by adding a different field of operation to its fixed wireless broadband operations. Shira employed 37 employees as of March 31, 2003, and
develops and provides digital prepress workflow solutions. Shiras solution automates the prepress production process and facilitates efficient collaboration between customers and printers/tradeshops.



The acquisition was accounted for using the purchase method
under SFAS 141. The purchase price was allocated to those assets acquired and liabilities assumed based on the estimated fair value of those assets and liabilities as of June 30, 2002 (acquisition date). Identifiable intangible assets
consist of acquired technology in the amount of $2,743,000 and customer list in the amount of $348,000. Goodwill represents the excess of the purchase price over the fair-value of the net tangible and identifiable intangible assets acquired. In
accordance with SFAS 142, goodwill which is related to Software Products is not amortized and is tested for impairment annually. The results of Shiras operations are consolidated from July 1, 2002.



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Identifiable
intangible assets are amortized over a period of three years. Amortization of identifiable intangible assets acquired for the three months ended March 31, 2003 was $258,000, of which the amortization of acquired technology was $228,000 and customer
list was $30,000. The amortization of identifiable intangible assets acquired is included in the cost of revenues. The accumulated amortization of acquired technology as of March 31, 2003 was $775,000 of which the accumulated amortization of
acquired technology was $685,000 and customer list was $90,000.



Future amortization expenses of identifiable intangible assets on a fiscal year basis are as follows:



|     |  | March 31, 2003
|---- |  | --------------
|     |  | In thousands  
|2003 |  | $             
|2004 |  |               
|2005 |  |               
|     |  |               
|     |  | $             
|     |  |               



The
following unaudited pro forma combined information presents a summary of the results of the operations of Vyyo and Shira as if the acquisition had occurred at January 1, 2002. The pro forma financial information is not necessarily indicative of the
combined results that would have been attained had the acquisition taken place at the beginning of 2002, nor is it necessarily indicative of future results.



|                                                                         |  | Three Months endedMarch 31, 2002       |       
|------------------------------------------------------------------------ |  | -------------------------------------- | ------
|                                                                         |  | In thousands, except per share amounts |       
|Net revenues                                                             |  | $                                      | 1,890 
|                                                                         |  |                                        |       
|Operating loss                                                           |  | $                                      | (3,245
|                                                                         |  |                                        |       
|Net Loss                                                                 |  | $                                      | (2,392
|                                                                         |  |                                        |       
|Net loss per shareBasic and diluted                                     |  | $                                      | (0.19 
|                                                                         |  |                                        |       
|Weighted average number of common shares outstandingBasic and diluted
* |  |                                        | 12,403
|                                                                         |  |                                        |       

---

|* |  | Net loss per share and weighted average number of common shares have been adjusted to reflect the 1-for-3 reverse stock split.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



Critical Accounting Policies



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



We
determined our significant accounting policies by considering



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accounting policies that involve the most complex or subjective decisions or assessments. We believe our most critical accounting policies
include the following:



Inventory
Valuation. In 2001, due to the dramatic slowdown in the telecommunications sector and the economy in general, we recorded a write-down of excess inventory and purchase commitments of $8.45 million. Our estimate was based on our expectations for
sales of our products in the foreseeable future due to the uncertainty of selling our existing products if and when the market recovers. In the three months ended March 31, 2003, inventory that was previously written-down to $0 by taking a charge of
$221,000 was sold for the amount of $135,000.



Restructuring expenses.In 2001, we implemented a restructuring program that resulted in a reduction in force of approximately 75% of our employees and in excess facilities and equipment, and accordingly, we recorded a charge
of $12.8 million. In the first quarter of 2003, we utilized $1.9 million from the restructuring expenses that were accrued in 2001. The remaining restructuring liability balance to be utilized relates to our anticipated loss under a noncancelable
lease agreement until it expires at the end of 2003.



Valuation of Identifiable Intangible Assets and Goodwill.Upon the acquisition of Shira, we recorded identifiable intangible assets of $3,091,000 and goodwill of $820,000. We amortize the identifiable assets over a period of
three years. We annually assess identifiable intangible assets and goodwill for recoverability through the estimated future cash flows resulting from the use of the assets. Our assessment for recoverability, based on Shiras valuation as of
December 31, 2002, resulted in an impairment charge of $400,000 related to the goodwill recorded upon the acquisition in accordance with SFAS No. 142 Goodwill and Other Intangible Assets.



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



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



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Results of Operations



Net Revenues.



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



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



Net revenues
from software products are comprised of software products and software license fees. Revenue allocated to software products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable,
and collectibility is probable.



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



Net revenues decreased by 73% to $485,000 in the
first quarter of 2003 from $1.8 million in the first quarter of 2002. Net revenues in the first quarter of 2003 included $139,000 from Software Products. The decrease in revenues in the first quarter of 2003 primarily reflects a reduction of capital
spending and further tightening of financial markets in the telecommunication industry, which has reduced our potential customers ability to secure financing and purchase equipment, and, to a lesser extent, also reflects delays in allocation
of the 3.5 GHz frequency in China to fixed wireless applications. Net revenues include revenues from sales of inventory that was previously written down to $0 in 2001 of approximately $135,000 in the first quarter of 2003 and $205,000 in the first
quarter of 2002. As a result of the write-down in 2001, the cost of revenues associated with the sales of this inventory has been accounted for as $0 .



Cost of Revenues.



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



Cost of revenues decreased to $370,000 in the first quarter of 2003 from $904,000 in the first quarter of 2002. Cost of revenues in the first quarter of 2003 included approximately $284,000 from
Software Products (including amortization of identifiable tangible assets acquired of $258,000). The decrease in cost of revenues and in the gross margin in the first quarter of 2003 was attributable primarily to the decrease in our net revenues for
the first quarter of 2003. As a result of the write-down of inventories to $0 in 2001, cost of revenues does not include $221,000 in the first quarter of 2003 and $197,000 in the first quarter of 2002 related to the sale of such inventories. While
we expect that the telecommunications industry may recover over time, substantial uncertainty exists as to our ability to sell our existing products if and when the market recovers.



Research and Development Expenses.



Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our
research and development activities. Substantially all of our wireless research and development activities are



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carried out in our facility in Jerusalem, Israel, and our software research and development activities in Shira are carried out in our
facility in Kfar Saba, Israel. These expenses are charged to operations as incurred. Grants received from the Office of the Chief Scientist at the Ministry of Industry and Trade in Israel are deducted from research and development expenses. Our
research and development expenses increased to $1.2 million in the first quarter of 2003 from $1.1 million in the first quarter of 2002. Research and development expenses included charges for stock compensation of $0 in the first quarter of 2003 and
$60,000 in the first quarter of 2002. Research and development expenses excluding charge for stock compensation increased in the first quarter of 2003 to $1.2 million from $1 million in the first quarter of 2002. Research and development expenses
included approximately $438,000 from Software Products in the first quarter of 2003. The increase in the expenses in 2003 was due to the additional expenses that we incurred from Software Products, partially offset by a decrease in the wireless
expenses in 2003 due to the reductions in our workforce and subcontractors, effected in the third and fourth quarters of 2002. As a result of these decreases in research and development activities, we may be unable to develop next generation
products and new products to meet the demands of the market.



Selling and Marketing Expenses.



Sales and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and expenses for travel, trade shows and promotional activities. Sales and marketing expenses increased to $1.3
million in the first quarter of 2003 from $1.2 million in the first quarter of 2002. Sales and marketing expenses included charges for stock compensation of $0 in the first quarter of 2003 and $74,000 in the first quarter of 2002. Sales and
marketing expenses excluding charges for stock compensation increased to $1.3 million in the first quarter of 2003 from $1.1 million in the first quarter of 2002. Sales and marketing expenses include approximately $657,000 from Software Products in
the first quarter of 2003. The increase in the expenses in 2003 was due to the additional expenses that we incurred from Software Products, partially offset by a decrease in the wireless expenses due to changes in the number of sales and marketing
personnel and the level of trade show and other promotional activities. In 2002, we reduced our expenses in response to the significant downturn in the global telecommunications industry and the decrease in orders for and sales of our products. As
part of this reduction in expenses, we effected a reduction in our sales and marketing workforce in the first quarter of 2002. In connection with this reduction in the first quarter of 2002, we incurred a one-time charge of approximately $300,000.



General and Administrative Expenses.



General and administrative expenses consist primarily of
personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, human resources and legal. General and administrative expenses decreased to $1.3 million in the quarter of 2003 from $1.5
million in the first quarter of 2002. General and administrative included charges for stock compensation of $0 in the first quarter of 2003 and $240,000 in the first quarter of 2002. General and administrative expenses excluding charges for stock
compensation were $1.3 million in both the first quarter of 2003 and the first quarter of 2002. General and administrative expenses included approximately $43,000 from Software Products in the first quarter of 2003. The decrease in general and
administrative expenses was primarily due to a reduction in compensation related expenses and reductions in our workforce in the fourth quarter of 2002. The decrease was partially offset by an increase in directors and officers insurance
costs. General and administrative expenses also included expenses of $254,000 for the first quarter of 2003, paid to an unaffiliated third party management company in connection with several charters of an aircraft for business travel purposes.
While we chartered the aircraft directly from the management company, the chartered aircraft is leased by Harmony Management, Inc., of which Davidi Gilo and his wife are the sole shareholders. Payments made by us to the management company for the
aircraft charters were ultimately paid to Harmony Management, after deductions for certain operating costs and charter management fees. Harmony Management has advised us that the hourly rate charged by the management company for these charters was
substantially less than the standard rate charged for similar charters to other unaffiliated parties.



Restructuring Charges



We utilized $1.9 million in the first quarter of 2003, and $268,000 in the first quarter of 2002, from the restructuring expenses that were accrued in 2001. In the first quarter of 2002, we recognized
income due to stock



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compensation income of $152,000 attributed to stock option variable plan accounting. In 2001, we implemented a restructuring program to
reduce operating expenses due to the dramatic and continuing slowdown in the telecommunications sector and the general economy. In connection with this restructuring, we recorded charges of $12.8 million in 2001. These charges are costs related to
excess facilities, abandoned equipment and employees severance and other related benefits. The restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of our workforce.



Interest Income, Net.



Interest income, net, includes interest and investment
income, foreign currency remeasurement gains and losses. Net interest income was $419,000 in the first quarter of 2003 and $901,000 in the first quarter of 2002, mainly from our cash and short-term investment balances from proceeds from our initial
and follow-on public offerings effected in 2000. We expect that our interest income will continue to decrease due to decreasing cash balances and reduced interest rates in financial markets.



Income Taxes.



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



Charge for Stock
Based Compensation.



Charge for stock
compensation represents the amortization of deferred compensation charges which are based on the aggregate differences between the respective exercise price of stock options and purchase price of stock at their dates of grant or sale and the deemed
fair market value of our common stock for accounting purposes, as well as stock compensation charges incurred in connection with modifications of stock awards in 2001. Deferred stock compensation is amortized over the vesting period of the
underlying options. Amortization and charge related to stock compensation were $0 in the first quarter of 2003 and $222,000 in the first quarter of 2002. The charges for stock compensation in the first quarter of 2002 were gross charges of $374,000
and a decrease in compensation of $152,000 related to an accounting variable plan in the first quarter of 2002.



Liquidity and Capital Resources



As of March 31, 2003, we had $67.2 million of cash, cash equivalents and short-term investments. In the first quarter of 2003, net cash used in operations was $5.1 million, comprised of our net loss of
$3.3 million and changes in other working capital accounts of $2.3 million, capital gain of $1,000, and partially offset by a non-cash charges of $434,000 for depreciation and amortization. In the first quarter of 2002, cash used in operations was
$2.7 million, comprised of our net loss of $1.8 million and changes in other working capital accounts of $1.3 million, and partially offset by a non-cash charges of $222,000 for deferred stock compensation charges and $264,000 for depreciation and
amortization.



In the first quarter of 2003, net
cash provided by investing activities was $8.7 million, comprised of our proceeds from sales and maturities of short-term investments net of our purchase of short-term investments of $8.8 million, proceeds from sale of property and equipment
amounting to approximately $1,000, and partially offset by an outflow of approximately $54,000 for investments in property and equipment. In the first quarter of 2002, net cash provided by investing activities was $9.2 million, comprised of our
proceeds from sales and maturities of short-term investments net of our purchase of short-term investments of $9.2 million, proceeds from sale of property and equipment amounting to approximately $2,000, and partially offset by an outflow of
approximately $10,000 for investments in property and equipment.



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Financing
activities in the first quarter of 2003 amounted to approximately $57,000 of proceeds from stock option exercises. Financing activities in the first quarter of 2002 amounted to approximately $24,000 of proceeds from stock option exercises.



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



New Accounting Pronouncements



In November 2002, the FASB issued FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45
requires the guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also elaborates on the disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees that it has issued and to be made in regard of product warranties. Disclosures required under FIN 45 are included in these financial statements. The initial recognition and initial measurement
provisions of this FIN are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 had no material effect on our consolidated interim financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46
Consolidation of Variable Interest Entities (FIN 46). Under FIN 46 entities are separated into two populations: (1) those for which voting interests are used to determine consolidation (this is the most common situation) and (2) those
for which variable interests are used to determine consolidation. FIN 46 explains how to identify Variable Interest Entities (VIE) and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interests, and
results of activities of a VIE in its consolidated financial statements. FIN 46 is effective as follows: for variable interests in variable interest entities created after January 31, 2003, FIN 46 shall apply immediately, for variable interests in
variable interest entities created before that date, FIN 46 shall applyfor public entitiesas of the beginning of the first interim or annual reporting period beginning after June 15, 2003. We do not expect the adoption of FIN 46 to have
a material effect on our consolidated financial statements.



RISK FACTORS



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



We may not be
successful in selling our business or acquiring new businesses on favorable terms, or at all, which would adversely affect our future prospects.



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



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



We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $9.2 million in 2002 and $3.3
in the first quarter of 2003. As of March 31, 2003, our accumulated deficit was approximately $162.9 million. In response to the significant decline in our business and revenues which began in 2001 and has continued through the present, we have
decreased our operating expenses in our wireless business; however, our expenses will continue to be significantly greater than our gross margin on revenues for the foreseeable future. Our revenues and gross margins may not grow or even continue at
their current level and may decline even further. Our gross margins have been favorably affected by sales of inventory that had been previously written off. If our revenues do not rapidly increase, or if our expenses increase at a greater pace than
our revenues, we will never become profitable. Our subsidiary Shira incurred net losses of $1.3 million in 2002 and $1.1 million in the first quarter of 2003, and had an accumulated shareholder deficit as of March 31, 2003 of $6.2 million. We
anticipate that Shira will continue to incur net losses for the foreseeable future.



If our subsidiary Shira fails to achieve significant market penetration and customer acceptance of its Xpressi product suite and other software products in the graphic arts and prepress industry, its prospects would be
substantially harmed.



The graphics arts
industry, and in particular the prepress industry, have experienced little or no growth in recent years. The industry is highly fragmented and many vendors operate in this market. In addition, customers and prospective customers of Shira and other
vendors that have already invested in significant amounts of printing and prepress equipment and software may not be willing or able to upgrade printing systems or increase expenditures for printing or prepress, especially in the current slow global
economy. These factors contribute to an environment characterized by intense competition, lower expenditures by customers and fewer sales opportunities for Shira. In 2002 and through the first quarter of 2003, Shiras sales were minimal. Shira
will be successful only if it is able to penetrate this market and substantially increase its market share in this industry. If Shira is unable to do so, its business would be harmed and its prospects significantly diminished.



Shiras workflow product, Xpressi, is new and relatively unknown, and
Shira may be unable to generate market acceptance of this product.



Shiras recently introduced product, Xpressi, is an advanced workflow solution, and Shiras business prospects depend in large part on the success of this product in the market. However, to date, Shira has only
begun to install this product with customers, and there are therefore only a very limited number of references for this product with which prospective customers can inquire. In addition, the success of Xpressi will depend on its ability to function
effectively on many different customers systems. Since Xpressi is new and currently installed with only a few customers, Shira may have difficulty in effectively integrating the product into customers systems such that the product
functions properly with each customers system. In addition, the printing prepress market is conservative and slow to adopt new technologies and methodologies. Shira is also generally considered in the industry as a small company offering
software shelf products rather than as a provider of integrated workflow solutions. As a result of these factors, Shira may be unable to convince customers to adopt this product. If Shira is unable to sell Xpressi on a large scale, Shiras
business and prospects would be substantially harmed.



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



During 2001, the global telecommunications market, and in particular the fixed wireless broadband access
market, experienced a significant downturn. We experienced dramatic decreases in the sales of our products and the adoption of our technology in 2001, and our sales have continued at a reduced level through the first quarter of 2003. In this
environment, we determined in 2001 that significant expenditures in our historical products and technology were not justified, and we reduced our workforce by approximately 75%, from 240 employees to 60 employees. During 2002 and the first quarter
of 2003, our workforce in the wireless broadband access business further declined by seven employees, to 53 employees at March 31, 2003. As a result of these reductions, we have



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reduced our research and development expenses and our sales and marketing expenses to what we believe are minimum levels. While we expect
that the telecommunications market may recover over time, any such recovery may occur only slowly. If the market does not recover in the near future and if our sales do not substantially increase from current levels, we will continue to incur
losses, and may never achieve profitability. Since we have reduced our sales and marketing workforce, we may be unable effectively to sell and market our products without substantially increasing sales and marketing expenses. Furthermore,
substantial uncertainty exists as to the ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively address customer needs in the telecommunications
market as it evolves with new and competitive products and technologies may be limited due to, among other things, our limited research and development budget.



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



Our future
success in the telecommunications business depends on high-speed wireless communications products gaining market acceptance as a means to provide voice and data communications services. Because these markets are relatively new and unproven, it is
difficult to predict if these markets will ever develop or expand. The largest MMDS license holder in the US, Sprint, announced during 2001 that it is suspending any new deployments and acquisition of new customers. The other major service
providers, including WorldCom, which is currently in Chapter 11 reorganization proceedings, have ceased, delayed or reduced their rollouts and may further delay or reduce rollouts in the future. In the event that service providers adopt technologies
other than the high-speed access and other than wireless technologies that we offer or if they delay further their deployment of high-speed wireless communication products, we will not be able to sustain or expand our business and may be required to
cease operations in this business.



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



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



In addition, commencing in 2001 and continuing through 2002 to the present, the market for telecommunications equipment significantly
declined, which severely adversely affected the entire telecommunications industry, including service providers, systems integrators and equipment providers, and reduced the business outlook and visibility of the industry. In connection with the
deterioration of global economic conditions, many of our customers and potential customers are also currently unable to obtain debt or equity financing for deployment of their wireless access networks and therefore do not currently have adequate
capital resources to purchase our products. If the telecommunications market, and in particular the market for broadband wireless access equipment, does not improve and grow, our business would be substantially harmed.



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



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



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



A relatively small number of customers account for a large percentage of our revenues. In the first quarter of 2003, Dalager Engineering
Inc. accounted for approximately 35% of our revenues (49% of our wireless revenues); Craig Wireless Intl Inc. accounted for approximately 11% of our revenues (16% of our wireless revenues); and Image Wireless accounted for approximately 11% of
our revenues (16% of our wireless revenues).



In
2002, Dalager Engineering Inc. accounted for approximately 25% of our revenues (26% of our wireless revenues); Wuhan Research Institute of Posts and Telecommunication accounted for approximately 22% of our revenues (23% of our wireless revenues);
Andrew Corporation accounted for approximately 12% of our revenues (13% of our wireless revenues); and one other customer from a settlement dispute accounted for approximately 11% of our revenues (11% of our wireless revenues).



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



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



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



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



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



We sell our wireless broadband access
systems based on individual purchase orders. Our customers are generally not obligated by long-term agreements to purchase our systems, and the agreements we have entered into do not obligate our customers to purchase a minimum number of systems.
Our customers can generally cancel or reschedule orders on short notice and discontinue using our systems at any time. Further, having a successful field system trial does not necessarily mean that the customer will order large volumes of our
systems. The reduction, delay or cancellation of orders from one or more of our customers could seriously harm our operating results. Our new subsidiary Shira also sells its software products pursuant to individual purchase orders with little or no
penalty for cancellation or rescheduling, and its customers are not obligated to purchase a minimum number of Shiras products.



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



We recently acquired Shira, a provider of software products for the prepress and publishing markets. We also
continue to explore investments in or acquisitions of other companies, products or technologies, including companies or technologies that are not complementary or related to our current wireless broadband access business. We have no experience in
the graphic arts industry, and we may therefore be unsuccessful in operating Shira as a profitable business. In addition, we may have difficulty integrating Shiras or other companies personnel, operations, products and technologies into
our current business. It also may be difficult to manage Shira since its management is based on the East Coast of the United States. These difficulties may disrupt our ongoing business, divert the time and attention of our management and employees
and increase our expenses. Moreover, the anticipated benefits of our acquisition of Shira or any other acquisition may not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill and other identifiable intangible assets and the incurrence of large and immediate write-offs, any of which could seriously harm our business. In addition, we expect that we will expend
significant resources in searching for and investigating new business opportunities, and may be unsuccessful in acquiring new businesses.



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



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



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



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



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



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



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



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



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



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



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



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



A delay in the recognition of revenue, even from one customer, may have a significant negative impact on our results of operations for a
given period. Also, because only a small portion of our expenses vary with our



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revenues, if revenue levels for a quarter fall below our expectations, we will not be able to timely adjust expenses accordingly, which would
harm our operating results in that period. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. If our operating results fall below the
expectations of investors in future periods, our share price will likely decline.



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



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



With respect to the business of Shira, there are
many providers of printing and prepress solutions participating in this market, and we believe that competition among these providers will increase. This increase in competition is likely to result in price reductions and reduced gross margins for
Shiras products in the future. Increased competition could also reduce Shiras sales and market acceptance of its products, and competitors could introduce products that would make Shiras solutions obsolete.



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



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



The graphic arts market is highly fragmented and is also characterized by rapid technological change, evolving industry standards, frequent new product introductions and enhancements, and changing
customer demands. Shira competes primarily based on price and performance of its products, and Shiras future success will therefore depend on its investing substantially in research and development to develop, introduce and support new
products and enhancements in a timely manner to gain market acceptance of Shiras products. Shira will also need to expand its sales and marketing efforts. There are a number of competitors for Shiras PDF workflow and other prepress
products, many of which are larger and have greater resources than Shira.



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



Our systems may contain undetected defects or errors. This
may result either from defects in components supplied by third parties or from errors or defects in our software or hardware that we have failed to detect. We have in the past experienced, and may experience from time to time in the future, defects
in new or enhanced products and systems after commencement of commercial shipments, or defects in deployed systems. Our customers integrate our systems into their networks with components from other vendors. Accordingly, when problems occur in a
network system it may be difficult to identify the component that caused the problem. Regardless of the source of these defects or errors, we will need to divert the attention of our engineering personnel



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from our product development efforts to address the defect or error. We have incurred in the past and may again incur significant warranty
and repair costs related to defects or errors, and we may also be subject to liability claims for damages related to these defects or errors. The occurrence of defects or errors, whether caused by our systems or the components of another vendor, may
result in significant customer relationship problems and injury to our reputation and may impair the market acceptance of our systems.



Shiras products and some of the third-party components used by Shira in its products use complex imaging technology and software.
Despite extensive testing, undetected bugs or errors may result in product failures from time to time. If Shiras products have an unacceptable failure rate, or have reliability or compatibility problems, Shira will be unable to sell its
products. Any such errors, bugs or other problems with Shiras technology or products could result in additional development costs and expenses, delays in development, and costs associated with warranty claims by our customers. Shiras
reputation and credibility with current and prospective customers could also suffer as a result of product problems or failures.



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



We currently have relationships with two contract manufacturers for the manufacturing of our fixed broadband wireless systems, which are
located in Israel. These relationships may be terminated by either party with little or no notice. If our manufacturers are unable or unwilling to continue manufacturing our systems in required volumes, we would have to identify qualified
alternative manufacturers, which would result in delays that could cause our results of operations to suffer. Our limited experience with these manufacturers does not provide us with a reliable basis on which to project their ability to meet
delivery schedules, yield targets or costs. If we are required to find alternative manufacturing sources, we may not be able to satisfy our production requirements at acceptable prices and on a timely basis, if at all. Any significant interruption
in supply would affect the allocation of systems to customers, which in turn could seriously harm our business. In addition, we currently have no formal agreement or relationship with a manufacturer for our modem products. Our current inventory of
modems will likely be insufficient to fulfill anticipated demand, and we may therefore be required to find a manufacturer in the near future. Our inability to identify and enter into a relationship with a manufacturer for our modems would harm our
business.



In addition, during 2001, we began to
focus our resources on direct sales to service providers. Such direct sales require us to resell to service providers equipment manufactured by third party suppliers and to integrate this equipment with the equipment we manufacture. We are
particularly dependent on third party radio suppliers in selling our 3.5 Ghz and other products. We currently have no formal relationship with any third party supplier. If we are unable to establish relationships with suppliers, or if these
suppliers are unable to provide equipment that meets the specifications of our customers on the delivery schedules required by our customers, and at acceptable prices, our business would be substantially harmed.



In general, Shira integrates third party technology in its
products and relies on third party service providers for a number of its products. If any of these third party vendors or service providers would cease to develop and support its relevant technology or terminate the contract agreement with Shira,
then Shira may not be able to support its current products or complete the development of new products or products software versions, and Shiras products would not be able to compete with other providers products that are developed
as industry standards. These factors would require Shira to invest significantly more effort and funding in searching for or developing alternative solutions, which could result in delays and increased costs, and ultimately in loss of customers and
decreased market share.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Sales outside of North America accounted for approximately 24% of our revenues in the first quarter of 2003 and 34% of our revenues in
2002 (sales to China in 2002 accounted for approximately 73% of our sales



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outside of North America). We expect that international sales, and in particular sales to China, may account for a substantial portion of our
revenues in future periods. In addition, we maintain research and development facilities in Israel. Our reliance on international sales and operations exposes us to foreign political and economic risks, which may impair our ability to generate
revenues. These risks include:



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



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



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



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



| |  |  | trade restrictions; and
| | - |  | -----------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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opportunities, develop or enhance systems or respond to competitive pressures. This potential inability to raise funds on acceptable terms
could seriously harm our business.



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



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



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



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



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



In the past, we received grants from the
government of Israel for the financing of a portion of our research and development expenditures for previous products in Israel. The regulations under which we received these grants restrict our ability to manufacture products or transfer
technology outside of Israel for products developed with this technology.



Shira has also received grants from the government of Israel for the financing of a portion of its research and development expenditures, and the regulations under which we received these grants restrict our ability to
manufacture products or transfer technology outside of Israel for products developed with this technology.



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



Several members of our board of directors, Lewis Broad, Neill
Brownstein, Avraham Fischer, Samuel Kaplan and Alan Zimmerman, and our President and Chief Operating Officer, Michael Corwin, have had professional relationships with our Chairman of the Board, Davidi Gilo, and his affiliated companies for several
years. These members of our board of directors previously served on the boards of directors of DSP



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Communications, Inc. and/or DSP Group, Inc., of which Mr. Gilo was formerly the controlling stockholder and the Chairman of the Board, and
Mr. Corwin previously served as an officer of DSP Group. In addition, Avraham Fischer is a senior partner of the law firm of Fischer, Behar, Chen & Co., which represents us on matters relating to Israeli law. There are no family relationships
between these directors and officers, and no member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of
directors or compensation committee. However, the long-term relationships between these directors and officers and Mr. Gilo and his affiliated companies could be deemed to limit their independence.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



In order for our common stock to continue to be quoted on the Nasdaq National Market, we must satisfy various listing maintenance standards established by Nasdaq, including the requirement that our common stock



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



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



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



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



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



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



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



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



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



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



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



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



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



As of March
31, 2003, we had cash, cash equivalents and short-term investments of $67.2 million. Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds that invest in corporate and government
fixed income securities that are subject to interest rate risk. We place our investments with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.



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



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



Quantitative Interest Rate Disclosure As of March 31, 2003



If market interest rates were to increase on March 31, 2003 immediately and uniformly by 10%, the fair value of the portfolio would
decline by approximately $60,000 or approximately 0.1% of the total portfolio (approximately 0.08% of total assets). Assuming that the average yield to maturity on our portfolio at March 31, 2003 remains constant throughout the second quarter of
2003 and assuming that our cash, cash equivalents and short-term investments balances at March 31, 2003 remain constant for the duration of the second quarter of 2003, interest income for the second quarter of 2003 would be approximately $658,000.
Assuming a decline of 10% in the market interest rates at March 31, 2003, interest income for the second quarter of 2003 would be approximately $652,000, which represents a decrease in interest income of approximately $6,000. The decrease in
interest income will result in a decrease of the same amount to net income and cash flows from operating activities for the three months ended March 31, 2003. These amounts are determined by considering the impact of the hypothetical interest rates
on our cash equivalents and available-for-sale securities at March 31, 2003, over the remaining contractual lives.



Item 4. Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures. Vyyos Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Vyyos disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, Vyyos disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Vyyo (including its consolidated
subsidiaries) required to be included in Vyyos periodic filings under the Exchange Act.



(b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in Vyyos internal controls or in other factors that could significantly affect such
controls.



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PART II. OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



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



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



Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



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



From April 3, 2000, until March 31, 2003, we
used approximately $6.3 million of the net offering proceeds for purchases of property, plant and equipment, approximately $2.4 million of the net proceeds for repayment of short term debt obligations, approximately $11.4 million of the net proceeds
for repurchase of our common stock, and approximately $58.9 million of the net offering proceeds for working capital.



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



From September
13, 2000, until March 31, 2003, we used none of the net proceeds from this offering. Our temporary investments of the net proceeds from both of the offerings have been in cash, cash equivalents and investment grade, short-term interest bearing
securities.



Item 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



None.



Item 5. OTHER INFORMATION



None.



Item 6. EXHIBITS AND REPORTS ON FORM 8-K



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



| | 99.1 |  | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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



No reports on Form 8-K were filed during the quarter ended March 31, 2003.



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SIGNATURES



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



|                   
|-------------------
|Date:  May 13, 2003
|                   
|                   
|                   
|                   
|                   
|                   



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I, Davidi Gilo, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Vyyo Inc. (the registrant);
|-- |  | -----------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                   
|-------------------
|Date:  May 13, 2003
|                   



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I, Arik Levi, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Vyyo Inc. (the registrant);
|-- |  | -----------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                   
|-------------------
|Date:  May 13, 2003
|                   



39