**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

| **x**                                 |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                             |
|---------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                            |   | ** **                                                                                                                                                                               |
| ** **                            |   | **For the Quarterly Period Ended June 30, 2007**                                                                                                                                         |
| ** **                            |   | ** **                                                                                                                                                                               |
| **or**                                |
| ** **                            |   | ** **                                                                                                                                                                               |
| **o**                                 |   | **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 000-30189** |

 

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**VYYO INC.**

(Exact name of registrant asspecified in its charter)

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

 

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

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

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

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o   No x

As of August 10, 2007, there were 18,537,498 shares ofCommon Stock outstanding.

 

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**INDEX**

**VYYO INC.**
|                                                                                                                     | ** ** | **Page No.** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I. FINANCIAL  INFORMATION                                                                                      |       |              |
|                                                                                                                |       |              |
| Item 1.  Condensed Consolidated Financial Statements                                                           |       |              |
|                                                                                                                |       |              |
| Condensed Consolidated  Balance Sheets at June 30, 2007 and December 31, 2006                                  |       | 1                 |
|                                                                                                                |       |              |
| Condensed Consolidated Statements of Operations for  the Three and Six Months Ended June 30, 2007 and June 30, 2006 |       | 2                 |
|                                                                                                                |       |              |
| Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007  and June 30, 2006          |       | 3                 |
|                                                                                                                |       |              |
| Notes to Condensed Consolidated Financial Statements                                                                |       | 4                 |
|                                                                                                                |       |              |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations           |       | 20                |
|                                                                                                                |       |              |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                            |       | 29                |
|                                                                                                                |       |              |
| Item 4.  Controls and Procedures                                                                               |       | 29                |
|                                                                                                                |       |              |
| PART II. OTHER  INFORMATION                                                                                         |       |              |
|                                                                                                                |       |              |
| Item  1A. Risk Factors                                                                                              |       | 30                |
|                                                                                                                |       |              |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                   |       | 44                |
|                                                                                                                |       |              |
| Item 6.  Exhibits                                                                                              |       | 45                |
|                                                                                                                |       |              |
| SIGNATURES                                                                                                          |       | 46                |

 

i

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**PARTI.****         FINANCIAL INFORMATION**

**Item 1.****            CondensedConsolidated Financial Statements**

**Vyyo Inc.**

**Consolidated Balance Sheets**

**(In thousands of U.S. $, except sharedata)**
| ** **                                                                                                                                                                                              | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                              |       |                    |       |                        |       |
| **Current Assets:**                                                                                                                                                                                     |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                              |       | $                       | 9,997      |                        | $          | 7,416 |   |
| Short-term  investments                                                                                                                                                                                 |       | 16,268                  |       | 11,272                      |       |
| Accounts  receivable trade, net:                                                                                                                                                                        |       |                    |       |                        |       |
| Related party  (note 3)                                                                                                                                                                                 |       | 745                     |       | 991                         |       |
| Other                                                                                                                                                                                                   |       | 172                     |       | 194                         |       |
|                                                                                                                                                                                                    |       | 917                     |       | 1,185                       |       |
| Inventory, net  (note 2)                                                                                                                                                                                |       | 2,287                   |       | 2,362                       |       |
| Other                                                                                                                                                                                                   |       | 1,303                   |       | 996                         |       |
| **Total  Current Assets**                                                                                                                                                                               |       | 30,772                  |       | 23,231                      |       |
| **Long-Term Assets:**                                                                                                                                                                                   |       |                    |       |                        |       |
| Restricted cash  (note 4)                                                                                                                                                                               |       | 5,000                   |       | 5,000                       |       |
| Property and  equipment, net                                                                                                                                                                            |       | 1,570                   |       | 1,676                       |       |
| Employee rights  upon retirement funded (note 6)                                                                                                                                                        |       | 1,181                   |       | 1,168                       |       |
| Debt issuance  costs, net                                                                                                                                                                               |       | 142                     |       | 1,074                       |       |
| **TOTAL  ASSETS**                                                                                                                                                                                       |       | $                       | 38,665     |                        | $          | 32,149 |   |
| ** **                                                                                                                                                                                              |       |                    |       |                        |       |
| **LIABILITIES AND CAPITAL  DEFICIENCY**                                                                                                                                                                 |       |                    |       |                        |       |
| **Current Liabilities:**                                                                                                                                                                                |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                        |       | $                       | 1,795      |                        | $          | 1,719 |   |
| Accrued  liabilities (note 5)                                                                                                                                                                           |       | 5,205                   |       | 7,877                       |       |
| Deferred  revenues, related party (note 3)                                                                                                                                                              |       | 3,590                   |       | 3,795                       |       |
| **Total  Current Liabilities**                                                                                                                                                                          |       | 10,590                  |       | 13,391                      |       |
| ** **                                                                                                                                                                                              |       |                    |       |                        |       |
| **Long-Term Liabilities:**                                                                                                                                                                              |       |                    |       |                        |       |
| Promissory note  (note 4)                                                                                                                                                                               |       | 5,745                   |       | 5,078                       |       |
| Senior secured  note (note 7)                                                                                                                                                                           |       | —                  |       | 5,085                       |       |
| Convertible note  (note 7)                                                                                                                                                                              |       | 35,000                  |       | 10,097                      |       |
| Liability for  employee rights upon retirement (note 6)                                                                                                                                                 |       | 2,339                   |       | 2,111                       |       |
| **Total  Liabilities**                                                                                                                                                                                  |       | 53,674                  |       | 35,762                      |       |
| **Capital Deficiency:**                                                                                                                                                                                 |       |                    |       |                        |       |
| Preferred stock,  $0.001 par value; 5,000,000 shares authorized, none issued                                                                                                                            |       | —                  |       | —                      |       |
| Common stock,  $0.0001 par value and paid in capital; 50,000,000 shares authorized,  18,521,969 and 18,114,031 shares issued and outstanding at June 30, 2007 and  December 31, 2006, respectively |       | 265,299                 |       | 260,966                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                                   |       | (7                      | )          | (3                          | )          |
| Accumulated  deficit                                                                                                                                                                                    |       | (280,301                | )          | (264,576                    | )          |
| **Total  Capital Deficiency**                                                                                                                                                                           |       | (15,009                 | )          | (3,613                      | )          |
| **TOTAL LIABILITIES AND CAPITAL DEFICIENCY**                                                                                                                                                            |       | $                       | 38,665     |                        | $          | 32,149 |   |

 

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

1

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**VyyoInc.**

**CondensedConsolidated Statements of Operations**

**(Inthousands, except per share data)(Unaudited)**
| ** **                                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **REVENUES**                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Revenues (note 10)                                                                          |       | $                                               | 354        |                                          | $          | 136 |   | $ | 816 |   | $ | 705 |   |
| Revenues from related party (notes 3 and 10)                                                |       | 1,313                                           |       | 2,625                                         |       | 1,474 |   | 4,425 |   |
| **TOTAL  REVENUES**                                                                         |       | 1,667                                           |       | 2,761                                         |       | 2,290 |   | 5,130 |   |
|                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **COST OF  REVENUES**                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Cost of products sold                                                                       |       | 393                                             |       | 52                                            |       | 1,011 |   | 370 |   |
| Cost of products sold, related party                                                        |       | 1,040                                           |       | 1,881                                         |       | 1,120 |   | 3,373 |   |
| Write down of inventory                                                                     |       | 136                                             |       | —                                        |       | 136 |   | — |   |
| Insurance reimbursement for damaged inventory                                               |       | (101                                            | )          | —                                        |       | (101 | ) | — |   |
| **Total Cost of Revenues**                                                                  |       | 1,468                                           |       | 1,933                                         |       | 2,166 |   | 3,743 |   |
| **GROSS  PROFIT**                                                                           |       | 199                                             |       | 828                                           |       | 124 |   | 1,387 |   |
| **OPERATING  EXPENSES**                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Research and development                                                                    |       | 2,763                                           |       | 2,950                                         |       | 5,631 |   | 5,411 |   |
| Sales and marketing                                                                         |       | 2,705                                           |       | 2,571                                         |       | 4,586 |   | 5,214 |   |
| General and administrative                                                                  |       | 2,274                                           |       | 1,949                                         |       | 4,321 |   | 4,944 |   |
| **Total Operating Expenses**                                                                |       | 7,742                                           |       | 7,470                                         |       | 14,538 |   | 15,569 |   |
| **OPERATING  LOSS**                                                                         |       | (7,543                                          | )          | (6,642                                        | )          | (14,414 | ) | (14,182 | ) |
| **FINANCIAL  INCOME**                                                                       |       | 410                                             |       | 390                                           |       | 654 |   | 545 |   |
| **FINANCIAL  EXPENSES**(consists  primarily of expenses for extinguishment of debt, note 7) |       | (791                                            | )          | (735                                          | )          | (4,953 | ) | (1,159 | ) |
| **LOSS  BEFORE INCOME TAXES**                                                               |       | (7,924                                          | )          | (6,987                                        | )          | (18,713 | ) | (14,796 | ) |
| **INCOME  TAXES**                                                                           |       | 3,238                                           |       | (286                                          | )          | 2,988 |   | (457 | ) |
| **LOSS  FROM CONTINUING OPERATIONS**                                                        |       | (4,686                                          | )          | (7,273                                        | )          | (15,725 | ) | (15,253 | ) |
| **DISCONTINUED  OPERATIONS**                                                                |       | —                                          |       | 30                                            |       | — |   | 30 |   |
| **LOSS  FOR THE PERIOD**                                                                    |       | $                                               | (4,686     | )                                             | $          | (7,243 | ) | $ | (15,725 | ) | $ | (15,223 | ) |
| **LOSS  PER SHARE**                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| **Basic  and diluted:**                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                       |       | (0.25                                           | )          | (0.41                                         | )          | (0.86 | ) | (0.91 | ) |
| Discontinued operations                                                                     |       | —                                          |       | —                                        |       | — |   | — |   |
|                                                                                        |       | (0.25                                           | )          | (0.41                                         | )          | (0.86 | ) | (0.91 | ) |
| **WEIGHTED  AVERAGE NUMBER OF SHARES**                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Basic and  diluted                                                                          |       | 18,417                                          |       | 17,611                                        |       | 18,257 |   | 16,740 |   |

 

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

2

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**Vyyo Inc.**

**Condensed Consolidated Statements ofCash Flows**

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

**(Unaudited)**
| ** **                                                                                                               | ** ** | **Six Months Ended   June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                               |       |                                                |       |   |   |
| Loss for the  period                                                                                                     |       | $                                                   | (15,725    | ) | $ | (15,223 | ) |
| Adjustments to  reconcile loss to net cash used in operating activities:                                                 |       |                                                |       |   |   |
| Income and expenses not involving cash flows:                                                                            |       |                                                |       |   |   |
| Depreciation and amortization                                                                                            |       | 428                                                 |       | 441 |   |
| Accretion and amortization of financing instruments,  net                                                                |       | 4,067                                               |       | 662 |   |
| Stock-based compensation, net                                                                                            |       | 2,457                                               |       | 3,066 |   |
| Capital gain on sales of property and equipment                                                                          |       | (4                                                  | )          | — |   |
| Decrease (increase) in assets and liabilities:                                                                           |       |                                                |       |   |   |
| Accounts receivable, related party                                                                                       |       | 246                                                 |       | (2,512 | ) |
| Accounts receivable, other                                                                                               |       | 22                                                  |       | 677 |   |
| Other current assets                                                                                                     |       | (307                                                | )          | (72 | ) |
| Inventory                                                                                                                |       | 75                                                  |       | 99 |   |
| Accounts payable                                                                                                         |       | 76                                                  |       | 581 |   |
| Accrued liabilities                                                                                                      |       | (2,416                                              | )          | 1,100 |   |
| Deferred revenues, related party                                                                                         |       | (205                                                | )          | 3,943 |   |
| Liability for employee rights upon retirement                                                                            |       | 228                                                 |       | 400 |   |
|                                                                                                                     |       |                                                |       |   |   |
| Net cash used in  operating activities                                                                                   |       | (11,058                                             | )          | (6,838 | ) |
|                                                                                                                     |       |                                                |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                                                |       |                                                |       |   |   |
| Purchase of  property and equipment                                                                                      |       | (580                                                | )          | (89 | ) |
| Purchase of  short-term investments                                                                                      |       | (22,500                                             | )          | (15,580 | ) |
| Proceeds from  sales and maturities of short-term investments                                                            |       | 17,500                                              |       | 10,501 |   |
| Proceed from  sale of property and equipment                                                                             |       | 6                                                   |       | — |   |
| Contributions to  severance pay funds                                                                                    |       | (13                                                 | )          | (81 | ) |
|                                                                                                                     |       |                                                |       |   |   |
| Net cash used in  investing activities                                                                                   |       | (5,587                                              | )          | (5,249 | ) |
|                                                                                                                     |       |                                                |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                                |       |                                                |       |   |   |
| Proceeds from  exercise of stock options                                                                                 |       | 1,876                                               |       | 1,285 |   |
| Proceeds from  issuance of common stock, Senior Secured Note, 2006 Convertible Note and  warrants, net of issuance costs |       | —                                              |       | 23,403 |   |
| Proceeds from  issuance of 2007 Convertible Note, net of issuance costs                                                  |       | 34,850                                              |       | — |   |
| Payments of  Senior Secured Note and 2006 Convertible Note                                                               |       | (17,500                                             | )          | — |   |
| Net cash provided  by financing activities                                                                               |       | 19,226                                              |       | 24,688 |   |
|                                                                                                                     |       |                                                |       |   |   |
| Increase in cash  and cash equivalents                                                                                   |       | 2,581                                               |       | 12,601 |   |
| Cash and cash  equivalents at beginning of period                                                                        |       | 7,416                                               |       | 2,548 |   |
|                                                                                                                     |       |                                                |       |   |   |
| Cash and cash  equivalents at end of period                                                                              |       | $                                                   | 9,997      |   | $ | 15,149 |   |
|                                                                                                                     |       |                                                |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                                                   |       |                                                |       |   |   |
| Cash paid for  taxes                                                                                                     |       | $                                                   | 9          |   | $ | 2 |   |
|                                                                                                                     |       |                                                |       |   |   |
| Cash paid for interest                                                                                                   |       | $                                                   | 869        |   | $ | 42 |   |

 

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

3

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**VyyoInc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

**1.****             Basisof Presentation**

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

**Liquidity,Capital Resources and Going Concern Considerations**

The consolidatedfinancial statements of Vyyo Inc. and its wholly-owned subsidiaries(collectively, the “Company”) are presented on a going concern basis, whichcontemplates the realization of assets and satisfaction of liabilities in thenormal course of business. The Company has experienced significant losses andnegative cash flows from operations since its incorporation. For the six monthsended June 30, 2007, the Company incurred a net loss of $15,725,000 and had anaccumulated deficit of $280,301,000. These matters raise substantial doubtabout the Company’s ability to continue as a going concern. The Company’sability to continue as a going concern will depend upon its ability to raiseadditional capital during the next 12 months or attain profitable operations.The Company is actively pursuing raising additional capital to fund itsoperations although there is no assurance that such capital will be availableto the Company. In addition, the Company is seeking to expand its revenue baseby adding new customers and to further reduce expenses. Failure to secure additionalcapital or to expand its revenue base would result in the Company depleting itsavailable funds and not being able to pay its obligations when they become due.The accompanying condensed consolidated financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the possible inability of the Company to continue as a goingconcern.

**Organization and Principles of Consolidation**

The unaudited condensed consolidated financialstatements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries.All material inter-company balances and transactions have been eliminated inconsolidation.

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

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

The Company’s Cable Solutions segment includes theCompany’s UltraBandTM products that are designed to expand cable operators’typical hybrid-fiber coax (“HFC”) network capacity in the “last mile” by up totwo times in the downstream and up to four times in the upstream. Additionally,it includes products that deliver telephony and data T1/E1 links to enterpriseand cellular providers over cable’s HFC networks. The Cable Solutions segmentalso includes the results of operations of Xtend Networks Ltd., an Israeliprivately-held company, and its wholly-owned, United States-based subsidiary,Xtend Networks Inc. (collectively, “Xtend”).

 The Company’s Wireless Solutions segmentincludes products which enable utilities and other network service providers tooperate private wireless networks for communications, monitoring andSupervisory Control And Data Acquisition of their geographically disbursed,remote assets. Additionally, it includes the Company’s WISP andtelecommunications products which address the needs of rural service providersto serve customers with wireless high-speed data beyond the reach oftraditional terrestrial networks.

4

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**Summary of Significant Accounting Principles**

***Financing***

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

In March 2006, the Company closed the privateplacement (the “2006 Financing”) with Goldman, Sachs & Co. of $25,000,000of common stock, the 2006 Convertible Note, the Senior Secured Note andwarrants to purchase common stock. The 2006 Financing resulted in estimated netproceeds to the Company of approximately $23,400,000. See note 7.

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

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

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

***Foreign CurrencyTransactions***

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

***Investments inMarketable Securities***

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

The Company recognizes an impairment charge when thedecline in the fair values of these investments below their cost basis isdeemed to be other-than-temporary. The Company considers various factors indetermining whether to recognize an impairment charge, including the length oftime and the extent to which the fair value has been below the cost basis, thecurrent financial condition of the investee and the Company’s intent andability to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value. The Company recognized noother-than-temporary impairment in its available-for-sale securities norrealized losses for the three and six months ended June 30, 2007 and 2006,respectively.

5

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***Cash Equivalents***

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

***Inventory***

Inventory is stated at the lower of cost or market,where cost includes material and labor. The Company regularly monitorsinventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on the Company’s estimated forecast of future productdemand and production requirements. Although the Company makes every effort toensure the accuracy of its forecasts of future product demand, any significantunanticipated changes in demand or technological developments wouldsignificantly impact the value of the inventory and the reported operatingresults. If actual market conditions are different than the Company’sassumptions, additional provisions may be required. The Company’s estimates offuture product demand may prove to be inaccurate, in which case the Company mayhave understated or overstated the provision required for excess and obsoleteinventory. In the future, if the inventory is determined to be overvalued, theCompany would recognize such costs in its cost of sales at the time of suchdetermination. If the Company’s inventory is determined to be undervalued, theCompany may have overstated its cost of sales in previous periods and wouldrecognize additional operating income only when the undervalued inventory wassold. During the three and six months ended June 30, 2007, the Company recordedan inventory valuation write-down of approximately $136,000.

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

***Fair Value ofFinancial Instruments***

The fair value of financial instruments included inthe Company’s working capital approximates carrying value. The SyntekPromissory Note (described in note 4), the Senior Secured Note and the 2006Convertible Note delivered in the 2006 Financing and the 2007 Convertible Notedelivered in the 2007 Financing are presented in the Balance Sheets as “Long-TermLiabilities,” at approximately their estimated fair value.

***Debt Issuance Costs***

Costs incurred in the issuance of the 2007 ConvertibleNote in the 2007 Financing included cash payments to legal advisors in the sixmonths ended June 30, 2007. Costs incurred in the issuance of the 2006Convertible Note and Senior Secured Note to the Company’s financial advisorincluded warrants to purchase shares of the Company’s common stock and cashpayments to legal and financial advisors in the year ended December 31, 2006.In the year ended December 31, 2006, the fair value of the warrants wasdetermined based on the Black-Scholes option-pricing model. Issuance costs aredeferred and amortized as a component of interest expense over the period fromissuance through the first redemption date.

***Extinguishment ofDebt***

In the 2007 Financing, the Company repaid the 2006Convertible Note and Senior Secured Note. The Company accounted for thisrepayment as “extinguishment of debt” under Emerging Issues Task Force (“EITF”)96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”(“EITF 96-19”). The Company initially recorded the 2007 Convertible Note at itsestimated fair value, and used that amount to determine the debt extinguishmentloss of $3,263,000 resulting from recognition of $2,231,000 in unamortizedaccretion and $1,032,000 in unamortized issuance expenses related to the 2006Convertible Note and Senior Secured Note.

***Property andEquipment***

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

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

6

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

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

***Revenue Recognition***

The Company generates revenues from sales of itsproducts. As of June 30, 2007, the Company’s revenues from services were notsignificant. The Company’s products are off-the-shelf products, sold “as is,”without further adjustment or installation. When establishing a relationshipwith a new customer, the Company also may sell these products together as apackage, in which case the Company typically ships products at the same time tothe customer.

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

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

The Company recognizes revenues related to theexclusivity provisions contained in the equipment purchase agreement withArcadian Networks, Inc. described in note 3 on a straight line basis, overthe 10-year term of that agreement.

***Product Warranty***

The Company provides for product warranty costs whenit recognizes revenue from sales of its products. The Company calculates theprovision as a percentage of sales, based on historical experience.

***Research andDevelopment Costs***

Research and development costs are expensed asincurred and consist primarily of personnel, facilities, equipment and suppliesfor research and development activities. Grants received by the Company’sIsraeli subsidiaries from the Office of the Chief Scientist at the Ministry ofIndustry and Trade in Israel and other research foundations are deducted fromresearch and development expenses as the related costs are incurred or as therelated milestone is met.

***Loss Per Share ofCommon Stock***

Basic and diluted loss per share are calculated and presented inaccordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”), for allperiods presented. All outstanding stock options and shares of restricted stockhave been excluded from the calculation of the diluted loss per share becausethese securities are not dilutive for the presented periods. For the six monthsended June 30, 2007, the total number of shares of common stock related tooutstanding options and the 2007 Convertible Note and warrants issued inconnection with the 2006 Financing and restricted stock excluded from thecalculations of diluted loss per share was 10,317,720. For the six months endedJune 30, 2006, the total number of shares of common stock related tooutstanding options and the 2006 Convertible Note, warrants issued inconnection with the 2006 Financing and restricted stock excluded from thecalculations of diluted loss per share was 7,519,056.

7

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***Stock-BasedCompensation***

Prior to January 1, 2006, the Company accountedfor employees’ stock-based compensation under the intrinsic value model inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and related interpretations.

Effective January 1, 2006, the Company adoptedSFAS No. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”).SFAS 123(R) supersedes APB 25 and related interpretations and amends SFASNo. 95, “Statement of Cash Flows.” SFAS 123(R) requires that awardsclassified as equity awards be accounted for using the grant-date fair valuemethod. The fair value of stock options is determined based on the number ofshares granted and the price of the Company’s common stock, and determinedbased on the Black-Scholes, Monte Carlo and the binomial option-pricing models,net of estimated forfeitures. The Company estimated forfeitures based onhistorical experience and anticipated future conditions. The Company uses theMonte Carlo valuation model only for stock options granted to executives in2005 and 2006 where vesting is subject to market condition criteria.

In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”). SAB 107 provides supplemental implementationguidance on SFAS 123(R), including guidance on valuation methods,inventory capitalization of stock-based compensation cost, income statementeffects, disclosures and other issues. SAB 107 requires stock-basedcompensation to be classified in the same expense line items as cashcompensation. The Company has applied the provisions of SAB 107 in its adoptionof SFAS 123(R). In addition, the Company has reclassified stock-basedcompensation from prior periods to correspond to current period presentationwithin the same operating expense line items as cash compensation paid toemployees.

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

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

In November 2005, FASB issued Staff Position No.SFAS 123(R)-3 “Transition Election Related to Accounting for Tax Effectsof Share-Based Payment Awards.” The Company elected to adopt the alternativetransition method provided in this FASB staff position for calculating the taxeffects of stock-based compensation pursuant to SFAS 123(R). Thealternative transition method includes simplified methods to establish thebeginning balance of the additional paid-in capital pool related to the taxeffects of employee stock-based compensation, which is available to absorb taxdeficiencies recognized after adoption of SFAS 123(R).  As of January 1, 2006, the cumulativeeffect of the Company’s adoption of SFAS 123(R) was not material.

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

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The fair value of each stock option granted during thethree and six months ended June 30, 2007 and 2006 was estimated at the date ofgrant using the Black-Scholes and the binomial valuation models, using thefollowing assumptions:
| ** **                             | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Black-Scholes  model assumptions:      |       |                                            |       |                                          |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | 4.56%-5.04                                      | %          | 4.66%-4.74                                    | %          | 4.56%-5.04 | % | 4.66%-4.74 | % |
| Weighted-average  expected life range  |       | 4.86-9.72                                       |       | 2.50-5.0                                      |       | 4.86-10.00 |   | 2.50-5.0 |   |
| Volatility  ranges                     |       | 0.62-0.63                                       |       | 0.62-0.76                                     |       | 0.61-0.64 |   | 0.62-0.76 |   |
| Dividend yields                        |       | —                                          |       | —                                        |       | — |   | — |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Monte Carlo  model assumptions:        |       |                                            |       |                                          |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | —                                          |       | —                                        |       | — |   | — |   |
| Weighted-average  expected life range  |       | —                                          |       | —                                        |       | — |   | 4.60 | % |
| Volatility  ranges                     |       | —                                          |       | —                                        |       | — |   | 5.3 |   |
| Dividend yields                        |       | —                                          |       | —                                        |       | — |   | 0.61 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Binomial  valuation model assumptions: |       |                                            |       |                                          |       |   |   |   |   |
| Risk-free interest  rates ranges       |       | 4.56%-5.04                                      | %          | 4.87%-5.33                                    | %          | 4.46-5.16 | % | 4.66%-5.33 | % |
| Weighted-average  expected life range  |       | 3.36-7.52                                       |       | 2.29-3.36                                     |       | 2.79-7.52 |   | 2.29-5.00 |   |
| Volatility  ranges                     |       | 0.56-0.98                                       |       | 0.42-0.87                                     |       | 0.33-0.98 |   | 0.42-0.87 |   |
| Dividend yields                        |       | —                                          |       | —                                        |       | — |   | — |   |

 

***Recent AccountingPronouncements***

In December 2006,FASB issued Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements”**(“EITF 00-19-2”). EITF 00-19-2specifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement should beseparately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” EITF00-19-2 is effective immediately for registration payment arrangements and thefinancial instruments subject to those arrangements that are entered into ormodified after December 21, 2006. For registration payment arrangementsand financial instruments subject to those arrangements that were entered intoprior to December 21, 2006, EITF 00-19-2 is effective for fiscal yearsbeginning after December 15, 2006. The Company does not expectEITF 00-19-2 to have a material impact on its consolidated financialstatements.

In February 2007,FASB issued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure manyfinancial assets and financial liabilities at fair value. Unrealized gains andlosses on items for which the fair value option has been elected are reported inearnings. SFAS 159 will be effective for the Company beginning January 1,2008. The Company is currently evaluating the impact that adoption of SFAS 159would have on its consolidated financial statements.

***Reclassifications***

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

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

Inventory is comprised of the following:
|                 | ** ** | **June 30,**                                | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **      | ** ** | **(In thousands of U.S. $)** | ** ** |
| Raw materials   |       | $                                                | 424        |                  | $          | 395 |   |
| Work in process |       | 397                                              |       | 445                   |       |
| Finished goods  |       | 1,466                                            |       | 1,522                 |       |
|            |       |                                             |       |                  |       |
|            |       | $                                                | 2,287      |                  | $          | 2,362 |   |

 

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**3.****                                      EquipmentPurchase Agreement with Arcadian Networks, Inc.**

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

Pursuant to the ANI Agreement, the Company sellscertain of its products and services to ANI over a 10-year term. The Companydistributes its products to ANI on an exclusive basis in the United States,Canada and the Gulf of Mexico (the “Relevant Territory”) to identified marketsif: (a) ANI makes two non-refundable payments of $4,000,000 during each ofthe first two years of the ANI Agreement; (b) ANI meets specified annualminimum product purchase amounts; and (c) ANI’s outstanding balances arebelow specified amounts.

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

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

The Company received an initial purchase order for$10,000,000 on March 31, 2006 (related to products to be purchased in the firstyear of the ANI Agreement) and the first exclusivity payment of $4,000,000 onApril 3, 2006, which satisfied ANI’s requirements for exclusivity in thefirst year of the ANI Agreement. As of June 30, 2007, the Company had notreceived the second $4,000,000 exclusivity payment, and thus the exclusivityprovisions of the ANI Agreement are of no further effect.

For the three and six months ended June 30, 2007, theCompany recognized revenue of $1,313,000 and $1,474,000, respectively, underthe ANI Agreement, which included income related to the exclusivity payment of$100,000 and $200,000, respectively, and product maintenance of $62,000 and$123,000, respectively. For the three and six months ended June 30, 2006, theCompany recognized revenue of $2,625,000 and $4,425,000, respectively, whichincluded income related to the exclusivity payment of $100,000 and $100,000,respectively, and product maintenance of $14,000 and $14,000, respectively. TheCompany will recognize the exclusivity payments from ANI over the 10-year termof the Purchase Agreement.

As of June 30, 2007, ANI’s outstanding accountsreceivable balance was $745,000 and the Company had deferred revenues from ANIsales of $3,590,000.

**4.****                                      PromissoryNote**

On June 30, 2004, the Company acquired all of theoutstanding shares of Xtend, an Israeli privately-held company that was adevelopment stage company at the time.As part of the purchase, the Company delivered a promissory note in theprincipal amount of $6,500,000 originally payable on March 31, 2007 (the “SyntekPromissory Note”). The Company accounted for the Syntek Promissory Note ascontingent consideration since it was payable only if the Company was unable tomeet certain key provisions. These key provisions were amended onDecember 16, 2005 as follows:

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

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

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·                                           theSyntek Promissory Note will be cancelled if:

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

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

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

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

As security for the amendedSyntek Promissory Note, the Company delivered a $5,000,000 irrevocable letterof credit, and deposited $5,000,000 with a bank and agreed to restrictions onwithdrawal until the letter of credit is cancelled. The letter of credit willbe cancelled if, for 45 consecutive trading days, all of the followingconditions exist: (a) the weighted average trading price of the Company’scommon stock is equal to or higher than $18.00 per share; (b) the averagedaily trading volume of the Company’s common stock is higher than 150,000shares per day; and (c) the holder is lawfully able to sell publicly inone transaction or in a series of transactions, during such 45 consecutivetrading days, all of its shares of the Company’s common stock withoutregistration under the Securities Act of 1933, as amended.

The Company determined that, asof the time of the amendment of the Syntek Promissory Note in December 2005 andimmediately prior to its amendment, the contingency had been resolved andtherefore the Company recorded $6,500,000 as additional consideration paid inthe Xtend acquisition. This resulted in an increase to the intangible assetsacquired. Following an impairment test performed on the intangible assets, theassets were immediately impaired. In addition, the Company estimated the fairvalue of the amended Syntek Promissory Note at $3,967,000 and recorded thisamount in the Balance Sheets as a long-term liability under “Promissory note.” TheCompany recorded $2,533,000, the difference between the value of the amendedSyntek Promissory Note and the original Syntek Promissory Note, as “GainResulting from Amendment to Promissory Note” in the Consolidated Statements ofOperations. In future periods the Company will record an accretion to the valueof the amended Syntek Promissory Note up to $6,500,000. The Company will recordthe accretion of $2,533,000 as finance expenses during the remaining term ofthe amended Syntek Promissory Note, unless it is cancelled as provided above.For the three and six months ended June 30, 2007, the Company recorded $344,000and $667,000, respectively, in financial expenses related to the accretion ofthe amended Syntek Promissory Note.

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**5.****             AccruedLiabilities**

Accrued liabilities consist of the following:
|                                               | ** ** | **June 30,**                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                                    | ** ** | **(In thousands of U.S. $)** | ** ** |
| Withholding tax*                              |       | $                                                | 339        |                  | $          | 3,321 |   |
| Compensation and  benefits                    |       | 1,828                                            |       | 1,995                 |       |
| Royalties                                     |       | 955                                              |       | 940                   |       |
| Professional fees                             |       | 392                                              |       | 361                   |       |
| Deferred rent                                 |       | 350                                              |       | 354                   |       |
| Interest payable  to Goldman, Sachs & Co. |       | 292                                              |       | 285                   |       |
| Warranty**                                    |       | 108                                              |       | 66                    |       |
| Deferred  revenues                            |       | 170                                              |       | 66                    |       |
| Other                                         |       | 771                                              |       | 489                   |       |
|                                          |       | $                                                | 5,205      |                  | $          | 7,877 |   |

 

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* In June 2007, the Company signed an agreement withits Israeli wholly-owned subsidiary to restructure its inter-company debt,whereby $77,139,000 previously classified as a loan was replaced and convertedinto a convertible capital note. The convertible capital note is convertibleinto ordinary shares of the wholly-owned subsidiary. Additionally, $17,062,000of accrued interest on the loan was forgiven.  Following the restructuringof debt and after consultation with the Company’s tax advisors and based on aruling received from the Israeli tax authorities, management concluded that thelikelihood of an exposure to withholding tax on the interest forgiven is nowremote.  As a result, the Company reversed its provision for withholdingtax on the debt interest of $3,226,000 (at March 31, 2007), which had beenprovided for as a liability in the Company’s financial statements.  Thereversal of the provision was recorded as income under “Income Taxes” in theConsolidated Statements of Operations for the three and six months ended June30, 2007.

** The changes in the warranty balances consist of thefollowing:
|                                                | ** ** | **Six Months  Ended  June 30,**        | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                         | ** ** | **2006**                               | ** ** |
| ** **                                     | ** ** | **(In thousands of U.S. $)** | ** ** |
| Balance at  beginning of period                |       | $                                                | 66         |                                   | $          | 104 |   |
| Usage of  warranty                             |       | (19                                              | )          | (59                                    | )          |
| Product warranty  issued for new sales         |       | 75                                               |       | 177                                    |       |
| Changes in  accrual of warranty periods ending |       | (14                                              | )          | (156                                   | )          |
| Balance at end of  period                      |       | $                                                | 108        |                                   | $          | 66 |   |

 

**6.****             SeveranceLiabilities**

The amounts paid related to severance and severanceexpenses were:
| ** **                         | ** ** | **Three Months  Ended June 30,**  | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Amounts paid  related to severance |       | $                                                | 447        |                                          | $          | 500 |   | $ | 576 |   | $ | 674 |   |
|                               |       |                                             |       |                                          |       |   |   |   |   |
| Severance expenses*                |       | $                                                | 434        |                                          | $          | 564 |   | $ | 742 |   | $ | 962 |   |

 

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* With respect to the Company’s Israeli employees, theCompany expects to contribute $333,000 to a defined contribution plan and$177,000 to insurance and pension plans for the year ended December 31, 2007 (includes amounts contributed in the six months ended June 30,2007).

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**7.****             Financing**

**2007  Financing**

OnMarch 28, 2007, the Company issued the 2007 Convertible Note ($35,000,000principal; 5% annual interest), initially convertible into 3,500,000 shares ofthe Company’s common stock to Goldman, Sachs & Co., of which$17,500,000 was used to pay off in full the Company’s outstanding 2006Convertible Note and Senior Secured Note delivered in the 2006 Financing.

The2007 Convertible Note is convertible at the holder’s option into shares of theCompany’s common stock at a conversion price of $10.00 per share, provided,that in no event may the holder own of record more than 14.8% of theoutstanding shares of the Company’s common stock. In the event of a FundamentalTransaction (as defined in the 2007 Convertible Note to include sales of theCompany’s assets and certain business combination transactions,) the holdermay, at its option, require the Company to redeem all or any portion of the2007 Convertible Note at a price equal to 101% of the principal amount, plusall accrued and unpaid interest, if any, and, subject to specified conditions,may be entitled to a cash “make-whole” premium, calculated in accordance withthe terms of the 2007 Convertible Note.

Underthe Amended and Restated Registration Rights Agreement executed in connectionwith the 2007 Convertible Note, the Company is required to file aregistration statement on Form S-3 registering the resale of the sharesissuable upon conversion of the 2007 Convertible Note for an initial two-yearperiod, subject to extension under specified circumstances.

TheCompany accounted for the issuance of the 2007 Convertible Note (and theresulting repayment of the 2006 Convertible Note and Senior Secured Note) asextinguishment of debt under EITF 96-19. As a result of the extinguishment ofthe 2006 Convertible Note and Senior Secured Note, the Company recorded$3,263,000 in the six months ended June 30, 2007 as financial expensesconsisting of $2,231,000 of unamortized accretion and $1,032,000 of unamortizedissuance expenses.

Inaccordance with the provisions of EITF 96-19, the Company recorded the 2007Convertible Note at its fair value, which is estimated at $35,000,000. The 2007Financing resulted in estimated net proceeds to the Company of approximately$17,350,000, following pay off of the 2006 Convertible Note and Senior SecuredNote and payment of issuance expenses of approximately $150,000.

**2006  Financing**

InMarch 2006, the Company closed the private placement of $25,000,000 of commonstock, the 2006 Convertible Note, the Senior Secured Note and warrants topurchase common stock to Goldman, Sachs & Co. In the 2006 Financing, theCompany issued (a) 1,353,365 shares of common stock, (b) the 2006Convertible Note ($10,000,000; 10% annual interest), (c) the Senior SecuredNote ($7,500,000 principal; 9.5% annual interest), and (d) warrants topurchase 298,617 shares of common stock. The transaction resulted in estimatednet proceeds to the Company of approximately $23,400,000.

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

 

Theestimated issuance costs of the 2006 Financing were approximately $1,993,000including (a) a $1,210,000 payment and issuance of warrants to purchase 79,559shares of the Company’s common stock, at exercise prices ranging from $0.10 to$10.00 (at an estimated fair value of $366,000), to the Company’s financialadvisor and (b) approximately $417,000 for legal and other professional feesand costs. Of these estimated issuance costs, $806,000 and $385,000 wereallocated to the 2006 Convertible Note and the Senior Secured Note, respectively.These costs were amortized based on the effective interest amortization methodthrough the five-year term until maturity of the notes and recorded as interestexpense, based on the effective interest method of amortization. The issuancecosts described above were allocated to the different instruments based ontheir relative fair values.

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Asnoted above, the Company repaid in full the 2006 Convertible Note and SeniorSecured Note with proceeds from the 2007 Financing, and the unamortizedaccretion and unamortized issuance expenses were extinguished at that time.

**8.****             Stock-Based Compensation**

**CommonStock Reserved for Issuance**

As ofJune 30, 2007, the Company reserved approximately1,403,188 shares of common stock for issuance, upon exercise of stock optionsand issuance of shares of restricted stock reserved under its stock-basedcompensation plans. These shares are available for issuance under the plansdescribed below.

**StockOption Plans**

TheCompany has the following stock option plans: the 1999 Employee and ConsultantEquity Incentive Plan and the Third Amended and Restated 2000 Employee andConsultant Equity Incentive Plan (the “2000 Plan”). The Company currently makesgrants only from the 2000 Plan, which permits the grant of incentive stockoptions (“ISOs”) to employees, nonstatutory stock options to employees,directors and consultants and stock options which comply with Israeli law ifgranted to persons who are subject to Israel income tax. The 2000 Plan alsoprovides for the awards of restricted stock and stock bonuses.

ISOsmust have an exercise price equal to the fair value of the common stock on thegrant date as determined by the Company’s board of directors. The period withinwhich the option may be exercised is determined at the time of grant, but maynot be longer than 10 years. The number of shares reserved under the 2000 Planis subject to automatic annual increases on the first day of each fiscal year,equal to the lesser of 1,500,000 shares or 10% of the number of outstandingshares on the last day of the immediately preceding year.

InAugust 2005, the Company granted certain employees options to purchase 145,000shares of the Company’s common stock at an exercise price of $0.10 per share.The market price on the date of grant was $6.75, which resulted in deferredstock compensation of $964,000, of which $222,000 was amortized during the yearended December 31, 2005 under APB No. 25.

InMarch 2005, the Company granted certain executives 630,000 options to purchaseshares of common stock for $7.50 to $10.50 per share. The options vest andbecome exercisable if the closing price of the Company’s common stock is at orabove specified prices for 10 trading days out of any 30 consecutive tradingdays, so long as the optionee remains an employee of or consultant to theCompany on the 10th day of the period. The options expire five years after thegrant date, or, if earlier, 90 days after the optionee is no longer an employeeof or consultant to the Company. As of June 30, 2007, 135,000 of these stockoptions were forfeited. For the three and six months ended June 30, 2007 andJune 30, 2006 the Company recorded expenses of $235,000 and $118,000,respectively, related to these stock options.

InMarch 2007, the Company granted its Vice Chairman of the board of directors250,000 options to purchase shares of common stock for $6.31 per share. Thisgrant was made to the Vice Chairman in his individual capacity as a consultantto the Company. The options vest and become exercisable in equal monthly installmentsover 48 months. These stock options may be accelerated upon the occurrenceof specified events, including certain financing events, approval of theCompany’s products in identified cable companies or upon a “Change of Control”(as defined in the related consulting agreement). For the three and six monthsended June 30, 2007, the Company recorded expenses of $201,000 and $237,000,respectively, related to these stock options.

**Grantof Stock Options to Davidi Gilo**

OnFebruary 10, 2006, the Company’s Compensation Committee approved the grantof stock options to Mr. Gilo, Chairman of the board of directors, topurchase 900,000 shares of the Company’s common stock. At the time, Mr. Giloalso was Chief Executive Officer of the Company. These options vest as follows:

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

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

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

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TheCompany recorded stock-based compensation expenses of $750,000 for the threeand six months ended June 30, 2006 related to the 300,000 options granted toMr. Gilo that vested upon the closing of the 2006 Financing. In connectionwith the 600,000 stock options granted to Mr. Gilo which vest based on theclosing price of the Company’s common stock, the Company recorded $57,000 and $136,000in the three and six months ended June 30, 2007, respectively, and $56,000 and$86,000 in the three and six months ended June 30, 2006, respectively. Thesestock-based compensation expenses were determined based on the Monte Carlovaluation method.

**RestrictedStock**

Recipientsof shares of restricted stock are entitled to cash dividends, to the extentpaid, and to vote their shares throughout the restricted period. The shares arevalued at the market price on the grant date, and compensation is amortizedratably over the vesting period. The Company must recognize compensationexpenses for shares of restricted stock subject to designated performancecriteria if the performance criteria are being attained or it is probable thatthey will be attained.

Asummary of stock option plans, shares of restricted stock and relatedinformation, under all of the Company’s equity incentive plans as of June 30,2007 is as follows (in thousands, except per share data):
| ** **                 | ** ** | **Options/Shares  available  for grants** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  fair value** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Balance at January 1, 2007 |       | 559                                            |       | 6,063                   |       | $                                      | 5.41       |                                   | —     |   |
| Authorized                 |       | 2,000                                          |       | —                  |       | —                                 |       | —                                 |       |
| Granted*                   |       | (1,624                                         | )          | 1,624                   |       | $                                      | 6.20       |                                   | $          | 2.68 |   |
| Exercised                  |       | —                                         |       | (404                    | )          | $                                      | 4.65       |                                   | —     |   |
| Cancelled                  |       | 468                                            |       | (468                    | )          | $                                      | 6.38       |                                   | —     |   |
| Balance at June 30, 2007   |       | 1,403                                          |       | 6,815                   |       | $                                      | 5.57       |                                   | —     |   |
|                            |            |                                                |            |                         |            |                                        |            |                                        |            |  |  |

 

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* Includes 165,625 options granted to non-employeedirectors in the six months ended June 30, 2007 and 250,000 additional optionsgranted to the vice chairman of the board of directors who also serves as aconsultant.

Thefollowing table summarizes information concerning outstanding and exercisableoptions under stock option plans as of June 30, 2007:
| ** **                                  | ** ** | **Options outstanding** | ** ** | **Options exercisable**                        | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of exercise prices** | ** ** | **Number  outstanding**      | ** ** | **Weighted  average  remaining  contractual  life** | ** ** | **Weighted  average  exercise  price per  Share** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  price per  share** | ** ** |
| ** **                                  | ** ** | **(In thousands)**      | ** ** | **(In years)**                                 | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Plans:                                      |       |                         |       |                                                |       |   |   |   |   |   |   |
| 0.10                                        |       | 120                          |       | 3.28                                                |       | $ | 0.10 |   | 38 |   | $ | 0.10 |   |
| 0.99                                        |       | 1                            |       | 0.92                                                |       | 0.99 |   | 1 |   | 0.99 |   |
| 2.27-3.40                                   |       | 584                          |       | 3.68                                                |       | 3.23 |   | 432 |   | 3.18 |   |
| 3. 92-5.86                                  |       | 3,003                        |       | 4.43                                                |       | 4.78 |   | 1,773 |   | 4.64 |   |
| 5. 99-8.43                                  |       | 3,008                        |       | 4.68                                                |       | 6.90 |   | 956 |   | 7.12 |   |
| 9.00-10.50                                  |       | 99                           |       | 2.50                                                |       | 9.72 |   | 19 |   | 9.60 |   |
|                                        |       | 6,815                        |       | 4.43                                                |       | $ | 5.57 |   | 3,219 |   | $ | 5.16 |   |

 

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**9.****                                      ComprehensiveLoss**

Thecomponents of comprehensive loss are as follows:
| ** **                                       | ** ** | **Three Months  Ended June 30,**  | ** **   | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|--------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                         | ** **   | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(In thousands of U.S. $)** | ** **   |
| Loss                                             |       | $                                                |  (4,686 | )                                             | $          |  (7,243 | ) | $ |  (15,725 | ) | $ |  (15,223 | ) |
| Unrealized loss on available-for-sale securities |       | (6                                               | )            | (9                                            | )          | (4 | ) | (9 | ) |
| Comprehensive loss                               |       | $                                                | (4,692       | )                                             | $          | (7,252 | ) | $ | (15,729 | ) | $ | (15,232 | ) |

 

**10.********                            SegmentReporting**

TheCompany’s business is divided into two segments: “Cable Solutions” and “WirelessSolutions.”
| ** **                                    | ** ** | **Three Months  Ended June 30,**  | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(In thousands of U.S. $)** | ** ** |
| Consolidated revenues from:                   |       |                                             |       |                                          |       |   |   |   |   |
|  Cable Solutions                         |       | $                                                | 325        |                                          | $          | 111 |   | $ | 787 |   | $ | 539 |   |
|  Wireless Solutions:                     |       |                                             |       |                                          |       |   |   |   |   |
|   Related party                     |       | 1,313                                            |       | 2,625                                         |       | 1,474 |   | 4,425 |   |
|   Other                             |       | 29                                               |       | 25                                            |       | 29 |   | 166 |   |
|                                          |       | 1,342                                            |       | 2,650                                         |       | 1,503 |   | 4,591 |   |
| Consolidated revenues                         |       | 1,667                                            |       | 2,761                                         |       | 2,290 |   | 5,130 |   |
|                                          |       |                                             |       |                                          |       |   |   |   |   |
| Operating loss:                               |       |                                             |       |                                          |       |   |   |   |   |
|  Cable Solutions                         |       | (6,268                                           | )          | (3,610                                        | )          | (11,873 | ) | (6,300 | ) |
|  Wireless Solutions                      |       | (1,275                                           | )          | (3,032                                        | )          | (2,541 | ) | (7,882 | ) |
|                                          |       |                                             |       |                                          |       |   |   |   |   |
|   Total consolidated operating loss |       | (7,543                                           | )          | (6,642                                        | )          | (14,414 | ) | (14,182 | ) |
|                                          |       |                                             |       |                                          |       |   |   |   |   |
|   Financial income                  |       | 410                                              |       | 390                                           |       | 654 |   | 545 |   |
|   Financial expenses                |       | (791                                             | )          | (735                                          | )          | (4,953 | ) | (1,159 | ) |
|   Income taxes                      |       | 3,238                                            |       | (286                                          | )          | 2,988 |   | (457 | ) |
|   Loss for the period               |       | $                                                | (4,686     | )                                             | $          | (7,273 | ) | $ | (15,725 | ) | $ | (15,253 | ) |

 

Thefollowing provides information on the Company’s assets:
|                                                   | ** ** | **June 30,**                                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                                        | ** ** | **(In thousands of U.S. $)** | ** ** |
| Cash, cash equivalents and short-term investments |       | $                                                | 26,265     |                  | $          | 18,688 |   |
| Restricted cash                                   |       | 5,000                                            |       | 5,000                 |       |
| Debt issuance costs, net                          |       | 142                                              |       | 1,074                 |       |
| Cable Solutions                                   |       | 3,269                                            |       | 3,139                 |       |
| Wireless Solutions                                |       | 3,989                                            |       | 4,248                 |       |
|                                              |       | $                                                | 38,665     |                  | $          | 32,149 |   |

 

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| ** **                                         | ** ** | **Three Months  Ended June 30,**  | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Expenditures for long-lived assets: |       |                                             |       |                                          |       |   |   |   |   |
| Cable Solutions                                    |       | $                                                | 82         |                                          | $          | 16 |   | $ | 230 |   | $ | 33 |   |
| Wireless Solutions                                 |       | 33                                               |       | 38                                            |       | 91 |   | 56 |   |
|                                               |       | $                                                | 115        |                                          | $          | 54 |   | $ | 321 |   | $ | 89 |   |
| Depreciation expenses:                             |       |                                             |       |                                          |       |   |   |   |   |
| Cable Solutions                                    |       | $                                                | 142        |                                          | $          | 114 |   | $ | 300 |   | $ | 229 |   |
| Wireless Solutions                                 |       | 68                                               |       | 98                                            |       | 128 |   | 212 |   |
|                                               |       | $                                                | 210        |                                          | $          | 212 |   | $ | 428 |   | $ | 441 |   |

 

Thefollowing is a summary of operations within geographic areas based on thelocation of the customers:
| ** **                                                            | ** ** | **Three Months  Ended June 30,**  | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **(In thousands of U.S. $)** | ** ** |
| Revenues from sales to affiliated and unaffiliated  customers in the: |       |                                             |       |                                          |       |   |   |   |   |
| Cable Solutions segment:  North America                               |       | $                                                | 325        |                                          | $          | 111 |   | $ | 787 |   | $ | 539 |   |
| Wireless Solutions segment:                                           |       |                                             |       |                                          |       |   |   |   |   |
| North America, related party                                          |       | $                                                | 1,313      |                                          | $          | 2,625 |   | $ | 1,474 |   | $ | 4,425 |   |
| North America                                                         |       | —                                           |       | 18                                            |       | — |   | 148 |   |
| Rest of the world                                                     |       | 29                                               |       | 7                                             |       | 29 |   | 18 |   |
|                                                                  |       | $                                                | 1,342      |                                          | $          | 2,650 |   | $ | 1,503 |   | $ | 4,591 |   |
|                                                                  |       |                                             |       |                                          |       |   |   |   |   |
|                                                                  |       | $                                                | 1,667      |                                          | $          | 2,761 |   | $ | 2,290 |   | $ | 5,130 |   |

 
|                              | ** ** | **June 30,**                                | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                   | ** ** | **(In thousands of U.S. $)** | ** ** |
| Property and equipment, net: |       |                                             |       |                  |       |
| Israel                       |       | $                                                | 963        |                  | $          | 1,008 |   |
| United States                |       | 607                                              |       | 668                   |       |
|                         |       | $                                                | 1,570      |                  | $          | 1,676 |   |

 

Salesto major customers out of total revenues are as follows:
| ** **                | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A, related party |       | 79                                              | %          | 94                                            | %          | 64 | % | 86 | % |
| Customer B                |       | 19                                              | %          | 4                                             | %          | 34 | % | 10 | % |

 

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**11.          EmploymentAgreement of Davidi Gilo, the Company’s Chairman of the Board of Directors**

OnApril 5, 2007, the Company entered into an amended and restated employmentagreement with Davidi Gilo (the “2007 Gilo Agreement”), which replaces andsupersedes his employment agreement executed in 2006.

Underthe 2007 Gilo Agreement, Mr. Gilo will continue to serve as the Company’sChairman of the board of directors (subject to approval of the Company’sstockholders and until his successor is duly appointed and elected). Theamendment has the same three-year term as his 2006 employment agreement(beginning February 2006), with automatic renewals thereafter for terms of oneyear each, subject to termination upon prior notice by either party. Inexchange for 20 hours of services per week, Mr. Gilo will receive an annualbase salary of $200,000, which will be reviewed on or before December 31, 2007and thereafter based on Mr. Gilo’s services and the Company’s financialresults. Mr. Gilo is eligible to receive employee benefits available to allemployees, is eligible to participate in bonus plans that may be adopted by theCompany’s board of directors and will be entitled to an additional annual bonusbased on his and the Company’s performance each year as determined by theCompany’s board of directors or Compensation Committee. In addition, Mr.Gilo is eligible for stock options that the Company may award, and he accrues30 days of paid vacation for each 12 months of employment, up to a maximum of60 days.

If theCompany terminates his employment without “Cause” (as defined in the 2007 GiloAgreement), all of Mr. Gilo’s unvested options vest immediately and Mr. Gilowill receive a severance payment equal to the greater of (a) the full amount ofcompensation that Mr. Gilo could have expected under the 2007 Gilo Agreement(based on his total compensation (salary and bonus) earned in 2007) through theend of the term; or (b) the full amount of compensation that Mr. Gilo couldhave expected under the 2007 Gilo Agreement for 18 months (based on his totalcompensation (salary and bonus) earned in 2007).

If theCompany terminates his employment without Cause after the initial three-yearterm, all of Mr. Gilo’s unvested options shall immediately vest and Mr. Gilowill receive a severance payment equal to the full amount of the compensationthat Mr. Gilo could have expected under the 2007 Gilo Agreement for 18 months(based on his total compensation (salary and bonus) earned in 2007).

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

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

**12.         Subsequent Events**

**Employmentof Robert K. Mills, the Company’s Chief Financial Officer**

TheCompany entered into an employment agreement with Mr. Mills, the Company’s newChief Financial Officer (the “Mills Agreement”).  The Mills Agreement has an initial two-yearterm, with automatic one-year renewals, subject to termination upon priornotice by either party.  Mr. Mills received a $25,000 signing bonus withan annual base salary of $245,000, and he is eligible to receive an annual cashbonus up to 60% of his then-current annual salary based on performanceobjectives.

If the Company terminateshis employment without “Cause” (as defined in the Mills Agreement) before theinitial two-year term, the Company must pay Mr. Mills severance equal to sixmonths of his annual salary (without bonus).

If Mr.Mills’ employment is terminated upon a “Change of Control” (as defined in theMills Agreement), he will receive (a) in lieu of the severance described in theforegoing paragraph, severance equal to his annual salary in effect during theyear in which a Change of Control occurs; (b) immediate vesting of all unvestedstock options; and (c) continuation of life, health, disability, vision,hospitalization, dental and other insurance coverage for one year. If upona Change of Control Mr. Mills is offered employment by the Company’s successorwith responsibilities substantially similar to those in the Mills Agreement andhe does not accept the offer, 33.3% of his stock options will immediatelyvest.  If upon a Change of Control Mr. Mills accepts employment by theCompany’s successor with responsibilities substantially similar to those in theMills

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Agreement, 33.3%of his stock options will immediately vest.  If Mr. Mills terminates hisemployment for Good Reason (as defined in the Mills Agreement) with the Company’ssuccessor on or after the six-month anniversary of the effective date of theMills Agreement, all remaining stock options held by him will immediatelyvest.

**CostReduction Program**

OnJuly 23, 2007, the Company’s management implemented a cost reduction program.In connection with this program, the Company has reduced its workforce byapproximately 16% (when compared to the workforce levels as of June 30, 2007)in the third quarter of 2007. The Company expects to record approximately$400,000 in a one-time cash severance payment and related expenses. This costreduction does not require the termination of any contractual obligations orrequire the Company to incur other material associated costs.

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

You should read thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in conjunction with our condensed consolidated financial statementsand accompanying notes appearing elsewhere in this Quarterly Report on Form10-Q. The matters addressed in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, with the exception of thehistorical information presented, contain forward-looking statements involvingrisks and uncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of certain factors,including those set forth in Item 1A below and elsewhere in this report.

## **Overview**

We provide cable andwireless broadband access solutions through two business segments: our “CableSolutions” segment and our “Wireless Solutions” segment. Our primary focus isnow on our Cable Solutions segment, and significantly all of our internalresources are focused on enhancing our visibility in and penetration of thecable market. The addition of James A. Chiddix as the Vice Chairman of ourboard of directors, Wayne H. Davis as our Chief Executive Officer, DavidFeldman as our Chief Technology Officer, and Robert K. Mills as our ChiefFinancial Officer, all with substantial cable industry experience, validatesour efforts and increases our visibility within the cable industry.

Our products are designedto address four markets: Cable, Telecommunication, Utility and WirelessInternet Service Providers (“WISP”). Although we are engaged to various degreesin these distinct markets, some of our core technologies overlap with ourrespective solutions.

Our Cable Solutionssegment includes our UltraBandTM products that are designed to expand cableoperators’ typical hybrid-fiber coax (“HFC”) network capacity in the “last mile”by up to two times in the downstream and up to four times in the upstream.Additionally, it includes products that deliver telephony and data T1/E1 linksto enterprise and cellular providers over cable’s HFC networks. Our CableSolutions segment also includes the results of operations of XtendNetworks Ltd., an Israeli company, and its wholly-owned, United States-basedsubsidiary, Xtend Networks Inc. (collectively, “Xtend”). We purchased allof the outstanding capital stock of Xtend on June 30, 2004 andconsolidated its operations with our operations beginning July 1, 2004.For a discussion of our acquisition of Xtend, see note 7 of our 2006annual Consolidated Financial Statements.

Our Wireless Solutionssegment includes products which enable utilities and other network serviceproviders to operate private wireless networks for communications, monitoringand Supervisory Control And Data Acquisition of their geographically disbursed,remote assets. Additionally, it includes our WISP and telecommunicationsproducts which address the needs of rural service providers to serve customerswith wireless, high-speed data beyond the reach of traditional terrestrialnetworks.

We have incurredsubstantial losses since commencing operations. For the six months ended June30, 2007, we incurred a net loss of $15,725,000 and had an accumulated deficitof $280,301,000. These matters raise substantial doubt about our ability tocontinue as a going concern. Our ability to continue as a going concern willdepend upon our ability to raise additional capital during the next 12 monthsor attain profitable operations. We are actively pursuing raising additionalcapital to fund our operations although there is no assurance that such capitalwill be available to us. In addition, we are seeking to expand our revenue baseby adding new customers and to further reduce expenses. Failure to secureadditional capital or to expand our revenue base would result in depleting ouravailable funds and not being able to pay our obligations when they become due.See “Liquidity, Capital Resources and Going Concern Considerations.”

On March 28, 2007,we closed the private placement of a convertible note with Goldman,Sachs & Co. in exchange for $35,000,000 (the “2007 Convertible Note”),which included $17,500,000 of new funding and $17,500,000 of which we used topay off the 2006 Convertible Note and Senior Secured Note delivered in the 2006Financing (all as described below). Our net proceeds from the 2007 Financingwere approximately $17,350,000. See also note 7.

In March 2006, weclosed the private placement of shares of common stock, a convertible note, asenior secured note and warrants to purchase common stock with Goldman,Sachs & Co. in exchange for $25,000,000 (the “2006 Financing”). In the2006 Financing we issued (a) 1,353,365 shares of our common stock,(b) a $10,000,000 10% Convertible Note (the “2006 Convertible Note”),(c) a $7,500,000 9.5% Senior Secured Note (the “Senior Secured Note”), and(d) warrants to purchase 298,617 shares of our common stock, all of whichwere exercised in 2006. Our net proceeds from the 2006 Financing were approximately$23,400,000.

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**SubsequentEvents**

**Employment of Robert K. Mills, ournew Chief Financial Officer**

We entered into anemployment agreement with Mr. Mills, our new Chief Financial Officer (the “MillsAgreement”).  The Mills Agreement has aninitial two-year term, with automatic one-year renewals, subject to terminationupon prior notice by either party.  Mr. Mills received a $25,000 signingbonus with an annual base salary of $245,000, and he is eligible to receive anannual cash bonus up to 60% of his then-current annual salary based onperformance objectives.

If we terminate his employment without “Cause” (asdefined in the Mills Agreement) before the initial two-year term, we must payMr. Mills severance equal to six months of his annual salary (without bonus).

If Mr. Mills’ employmentis terminated upon a “Change of Control” (as defined in the Mills Agreement),he will receive (a) in lieu of the severance described in the foregoingparagraph, severance equal to his annual salary in effect during the year inwhich a Change of Control occurs; (b) immediate vesting of all unvested stockoptions; and (c) continuation of life, health, disability, vision,hospitalization, dental and other insurance coverage for one year. If upona Change of Control Mr. Mills is offered employment by our successor withresponsibilities substantially similar to those in the Mills Agreement and hedoes not accept the offer, 33.3% of his stock options will immediatelyvest.  If upon a Change of Control Mr. Mills accepts employment by oursuccessor with responsibilities substantially similar to those in the MillsAgreement, 33.3% of his stock options will immediately vest.  If Mr. Millsterminates his employment for Good Reason (as defined in the Mills Agreement)with our successor on or after the six-month anniversary of the effective dateof the Mills Agreement, all remaining stock options held by him willimmediately vest.

**CostReduction Program**

On July 23, 2007,our management began the implementation of a cost reduction program. Wereviewed the size and composition of our workforce and made adjustments afterevaluating a variety of factors. In connection with this cost reductionprogram, we have reduced our workforce by approximately 16% in the UnitedStates and Israel (when compared to the workforce levels as of June 30, 2007)in the third quarter of 2007. We expect to record approximately $400,000 in aone-time cash severance payment and related expenses. This cost reduction doesnot require the termination of any contractual obligations or require us toincur other material associated costs.

**CriticalAccounting Principles**

The discussion andanalysis of our financial condition and results of operations is based upon ourunaudited interim condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us tomake estimates, judgments and assumptions that affect the reported assets andliabilities, revenues and expenses and related disclosure of contingent assetsand liabilities at the date of the financial statements. Actual results maydiffer from these estimates, judgments and assumptions.

Our significantaccounting principles are described in the notes to our 2006 annualconsolidated financial statements in the Annual Report on Form 10-K for theyear ended December 31, 2006. We determined the critical principles byconsidering accounting principles that involve the most complex or subjective decisionsor assessments. We believe our most critical accounting principles include thefollowing:

***RevenueRecognition***

We generate revenues from sales of our products. As ofJune 30, 2007, our revenues from services were not significant. Our productsare off-the-shelf products, sold “as is,” without further adjustment orinstallation. When establishing a relationship with a new customer, we also maysell these products together as a package, in which case we typically shipproducts at the same time to the customer.

We record revenues from our products when(a) persuasive evidence of an arrangement exists; (b) delivery hasoccurred and customer acceptance requirements have been met, if any, and wehave no additional obligations; (c) the price is fixed or determinable;and (d) collection of payment is reasonably assured. Our standard salesterms generally do not include customer acceptance provisions. However, ifthere is a right of return, customer acceptance provision or uncertainty aboutcustomer acceptance, we defer the associated revenue until we have evidence ofcustomer acceptance.

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Emerging Issues Task Force (“EITF”) No. 00-21, “RevenueArrangements with Multiple Deliverables,” addresses when and how an arrangementinvolving multiple deliverables should be divided into separate units ofaccounting. Our multiple deliverables arrangements are those arrangements withnew customers in which we sell our products together as a package. Because wedeliver these off-the-shelf products at the same time and the four revenuerecognition criteria discussed above are met at that time, the adoption of EITFNo. 00-21 had no impact on our financial position and results ofoperations.

We recognize revenues related to the exclusivityprovisions contained in the equipment purchase agreement with ArcadianNetworks, Inc. (“ANI”) described in note 4 of our 2006 annual ConsolidatedFinancial Statements on a straight line basis, over the 10-year term of thatagreement.

***Inventory***

We regularly monitorinventory quantities on hand and record a provision for excess and obsoleteinventory based primarily on our estimated forecast of future product demandand production requirements. Although we make every effort to ensure theaccuracy of our forecasts of future product demand, any significantunanticipated changes in demand or technological developments wouldsignificantly impact the value of our inventory and reported operating results.If actual market conditions are different from our assumptions, additionalprovisions may be required. Our estimate of future product demand may prove tobe inaccurate, in which case we may have understated or overstated theprovision required for excess and obsolete inventory. If we later determinethat our inventory is overvalued, we would be required to recognize such costsin our costs of sales at the time of such determination. If we later determinethat our inventory is undervalued, we may have overstated our costs of sales inprevious periods and would be required to recognize additional operating incomeonly when the undervalued inventory was sold. During the three and six monthsended June 30, 2007, we recorded an inventory valuation write-down ofapproximately $136,000.

We adopted the provisionsof the Financial Accounting Standards Board (“FASB”) Statement No. 151, “InventoryCosts” (“FASB 151”), as of January 1, 2006, which did not have a materialeffect on our financial statements. Under FASB 151 we are required to recognizeabnormal idle facility expenses as current-period charges, and to allocatefixed production overhead costs to inventory based on normal capacity of theproduction facility.

***Extinguishment of Debt***

As noted above, in the2007 Financing we repaid the 2006 Convertible Note and Senior Secured Note. Weaccounted for this repayment as “extinguishment of debt” under the EmergingIssues Task Force 96-19, “Debtor’s Accounting for a Modification or Exchange ofDebt Instruments” (“EITF 96-19”). We initially recorded the 2007 ConvertibleNote at fair value, and we used that amount to determine the debtextinguishment loss of $3,263,000 recognized as a result of $2,231,000 inunamortized accretion and $1,032,000 in unamortized issuance expenses relatedto the 2006 Convertible Note and Senior Secured Note.

***Fair Value of Financial Instruments***

The fair value of thefinancial instruments included in our working capital approximates carryingvalue. The Syntek Promissory Note, the Senior Secured Note and the 2006Convertible Note delivered in the 2006 Financing and the 2007 Convertible Notedelivered in the 2007 Financing are presented in the Balance Sheets as “Long-TermLiabilities,” at approximately their estimated fair value.

***Debt Issuance Costs***

Costs incurred in theissuance of the 2007 Convertible Note included cash payments to legal advisors.Costs incurred in the issuance of the 2006 Convertible Note and the SeniorSecured Note included warrants to purchase shares of our common stock to ourfinancial advisor and cash payments to legal and financial advisors in the yearended December 31, 2006. In the year ended December 31, 2006, the fair value ofthe warrants was determined based on the Black-Scholes option-pricing model.Issuance costs are deferred and amortized as a component of interest expenseover the period from issuance through the first redemption date.

***Stock-Based Compensation***

Prior to January 1,2006, we accounted for employees’ stock-based compensation under the intrinsicvalue model in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”) and relatedinterpretations.

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Effective January 1,2006, we adopted SFAS No. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”).SFAS 123(R) supersedes APB 25 and related interpretations and amends SFASNo. 95, “Statement of Cash Flows.” SFAS 123(R) requires that awardsclassified as equity awards be accounted for using the grant-date fair valuemethod. The fair value of stock options is determined based on the number ofshares granted and the price of our common stock, and determined based on theBlack-Scholes, Monte Carlo and the binomial option-pricing models, net ofestimated forfeitures. We estimated forfeitures based on historical experienceand anticipated future conditions. The Monte Carlo valuation model is used onlyfor stock options granted to executives in 2005 and 2006 where vesting issubject to market condition criteria.

In March 2005, theSEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB107”) which provides supplemental implementation guidance on SFAS 123(R),including guidance on valuation methods, inventory capitalization ofstock-based compensation cost, income statement effects, disclosures and otherissues. SAB 107 requires stock-based compensation to be classified in the sameexpense line items as cash compensation. We applied the provisions of SAB 107in our adoption of SFAS 123(R). In addition, we have reclassifiedstock-based compensation from prior periods to correspond to current periodpresentation within the same operating expense line items as cash compensationpaid to employees.

We elected to recognizecompensation cost for an option granted with service conditions that havegraded vesting schedules using the graded vesting attribution method.

We elected to adopt themodified prospective transition method permitted by SFAS 123(R). Underthis transition method, we implemented SFAS 123(R) as of the first quarterof 2006 with no restatement of prior periods. The valuation provisions ofSFAS 123(R) apply to new awards and to awards modified, repurchased orcancelled after January 1, 2006. Additionally, we recognize compensationcost over the remaining service period for the portion of awards for which therequisite service has not been rendered using the grant-date fair value ofthose awards as calculated for pro forma disclosure purposes underSFAS 123.

In November 2005,FASB issued Staff Position No. SFAS 123(R)-3, “Transition Election Relatedto Accounting for Tax Effects of Share-Based Payment Awards” (“SFAS 123(R)-3”).We elected to adopt the alternative transition method provided in SFAS 123(R)-3for calculating the tax effects of stock-based compensation pursuant toSFAS 123(R). The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in capital poolrelated to the tax effects of employee stock-based compensation, which isavailable to absorb tax deficiencies recognized after adoption ofSFAS 123(R).

As of January 1,2006, the cumulative effect of our adoption of SFAS 123(R) was notmaterial.

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

Expense related tostock-based compensation is included in the following line items in theStatements of Operations:
| ** **                  | ** ** | **Three Months  Ended June 30,**  | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(In thousands of U.S. $)** | ** ** |
| Cost of revenues            |       | $                                                | 15         |                                          | $          | 22 |   | $ | 33 |   | $ | 36 |   |
| Research and  development   |       | $                                                | 157        |                                          | $          | 222 |   | $ | 287 |   | $ | 439 |   |
| Sales and  marketing        |       | $                                                | 623        |                                          | $          | 305 |   | $ | 913 |   | $ | 774 |   |
| General and  administrative |       | $                                                | 777        |                                          | $          | 536 |   | $ | 1,224 |   | $ | 1,817 |   |

 

**Recent Accounting Pronouncements**

In December 2006, FASBissued Staff Position EITF 00-19-2, “Accountingfor Registration Payment Arrangements” (“EITF 00-19-2”). EITF 00-19-2specifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement should beseparately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” EITF00-19-2 is effective immediately for registration payment arrangements and thefinancial instruments subject to those arrangements that are entered into ormodified

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subsequent toDecember 21, 2006. For registration payment arrangements and financialinstruments subject to those arrangements that were entered into prior toDecember 21, 2006, the guidance in EITF 00-19-2 is effective for fiscalyears beginning after December 15, 2006. We do not expectEITF 00-19-2 to have a material impact on our consolidated financialstatements.

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

## **Results of Operations**

***Revenues***

Revenues decreased to $1,667,000 in the three monthsended June 30, 2007 from $2,761,000 in the three months ended June 30, 2006,and to $2,290,000 in the six months ended June 30, 2007 from $5,130,000 in thesix months ended June 30, 2006. This decrease in revenues for the three and sixmonths ended June 30, 2007 was primarily due to $1,313,000 and $1,474,000,respectively, in revenue from our Wireless Solutions segment for products soldto ANI (a related party as discussed in note 3), which was a reduction from the$2,625,000 and $4,425,000, respectively, in revenue compared to the sameperiods in 2006. These reductions were offset by revenue of $325,000 and$787,000 for the three and six months ended June 30, 2007, respectively,compared to revenue of $111,000 and $539,000 for the respective periods in 2006from our Cable Solutions segment for products sold to a top five cabletelevision multi-system operator (“MSO”). Revenue for the three and six monthsended June 30, 2007 and 2006 did not include inventory previously written downto $0.

Our revenue is concentrated among relatively fewcustomers, as set forth below. Though our principal revenue-generatingcustomers are likely to vary on a quarterly basis, we anticipate that ourrevenues will remain concentrated among a few customers for the foreseeable future.
|                            | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A,  related party |       | 79                                              | %          | 94                                            | %          | 64 | % | 86 | % |
| Customer B                 |       | 19                                              | %          | 4                                             | %          | 34 | % | 10 | % |

 

***Costof Revenues***

Cost of revenues consists of component and materialcosts, direct labor costs, warranty costs and overhead related to manufacturingour products.

Cost of revenues decreased to $1,468,000 during thethree months ended June 30, 2007 from $1,933,000 during the three months endedJune 30, 2006, and was $2,166,000 and $3,743,000 in the six months ended June30, 2007 and 2006, respectively. The decrease in cost of revenues was primarilyattributable to decreases in shipments of our products. For the three monthsended June 30, 2007, we recorded a write-down of inventory of $136,000.Our gross margins during the three and six months ended June 30, 2007decreased primarily due to the decrease in shipments of our products togetherwith flat fixed costs. We anticipate that our gross margins will continue to fluctuatebased on our product and customer mix, revenue level and inventory valuations.

***Researchand Development***

Our research and development expenses were $2,763,000and $2,950,000 during the three months ended June 30, 2007 and 2006,respectively, and $5,631,000 and $5,411,000 for the six months ended June 30,2007 and 2006, respectively. Approximately $2,095,000 and $1,591,000 of theseexpenses were from our Cable Solutions segment for the three months ended June30, 2007and 2006, respectively, and $4,301,000 and $2,741,000 of these expenseswere from our Cable Solutions segment for the six months ended June 30, 2007and 2006, respectively. Approximately $668,000 and $1,359,000 of theseexpenses were from our Wireless Solutions segment for the three months endedJune 30, 2007 and 2006, respectively, and $1,330,000 and $2,670,000 of theseexpenses were from our Wireless Solutions segment for the six months ended June30, 2007 and 2006, respectively. These expenses consisted primarily ofpersonnel, facilities, equipment and supplies and were charged to operations asincurred. All of our research and development activities are conducted in ourIsraeli facility.

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The increase in our research and development expensesin our Cable Solutions segment during the three months ended June 30, 2007compared to the three months ended June 30, 2006 resulted from (a) an increasein salaries and compensation from $756,000 to $1,221,000 due to an increase inour Cable Solutions segment workforce compared to the workforce as of June 30,2006 and (b) an increase in overhead expenses from $145,000 to $270,000 duringthe three months ended June 30, 2006 and 2007, respectively, partly offsetby a decrease in subcontractors, materials and other professional fees from$386,000 during the three months ended June 30, 2006 to $248,000 during thethree months ended June 30, 2007.

The increase in our research and development expensesin our Cable Solutions segment during the six months ended June 30, 2007compared to the six months ended June 30, 2006 mainly resulted from (a) anincrease in salaries and compensation from $1,369,000 to $2,448,000,respectively, due to the an increase in our Cable Solutions segment workforcecompared to the workforce as of June 30, 2006, (b) an  increase in overhead expenses from $283,000to $496,000, respectively, and (c) an increase in subcontractors, materials andother professional fees from $525,000 to $693,000 during the six months endedJune 30, 2007 compared to the six months ended June 30, 2006, respectively.

The decrease in our research and development expensesin our Wireless Solutions segment during the three months ended June 30, 2007compared to the three months ended June 30, 2006 resulted from (a) a decreasein salaries and compensation from $676,000 to $273,000, respectively, due to adecrease in our Wireless Solutions segment workforce compared to the workforceas of June 30, 2006, (b) a decrease in subcontractors, materials and otherprofessional fees from $339,000 to $158,000, respectively, and (c) a decreasein non-cash expenses related to stock option grants to our research anddevelopment employees and consultants from $86,000 to $23,000 during thethree months ended June 30, 2006 and 2007, respectively.

The decrease in our research and development expensesin our Wireless Solutions segment during the six months ended June 30, 2007compared to the six months ended June 30, 2006 resulted from (a) a decrease insalaries and compensation from $1,291,000 to $609,000, respectively, due to thedecrease in our Wireless Solutions segment workforce compared to the workforceas of June 30, 2006, (b) a decrease in subcontractors, materials and otherprofessional fees from $607,000 to $233,000, respectively, and (c) a decreasein non-cash expenses related to stock option grants to our research anddevelopment employees and consultants from $203,000 to $40,000 during thesix months ended June 30, 2006 and 2007, respectively.

***Salesand Marketing***

Sales and marketing expenses increased to $2,705,000and $4,586,000 during the three and six months ended June 30, 2007,respectively, compared to $2,571,000 and $5,214,000 during the three and sixmonths ended June 30, 2006, respectively. Sales and marketing expenses consistof salaries and related costs for sales and marketing employees, consultingfees and expenses for travel, trade shows, market research, branding andpromotional activities.

Sales and marketing expenses for our Cable Solutionssegment were approximately $2,616,000 and $4,341,000 during the three and sixmonths ended June 30, 2007, respectively, compared to $1,803,000 and $3,347,000for the three and six months ended June 30, 2006, respectively.

The increase during the three months ended June 30,2007 compared to the three months ended June 30, 2006 resulted mainly fromincreases in (a) salaries, compensation and recruiting fees from $727,000 to$1,262,000 due to the increase in our Cable Solutions segment workforcecompared to the workforce as of June 30, 2006 (b) non-cash expenses related tostock option grants of $620,000 compared to $394,000 and (c) trade shows,branding and promotional activities of $213,000 compared to $178,000 during thethree months ended June 30, 2006.

The increase during the six months ended June 30, 2007compared to the six months ended June 30, 2006 resulted mainly from increasesin (a) salaries, compensation and recruiting fees of $2,256,000 compared to$1,519,000 due to the increase in our Cable Solutions segment workforcecompared to the workforce as of June 30, 2006 and (b) non-cash expenses relatedto stock option grants of $908,000 compared to $723,000 during the six monthsended June 30, 2007 and 2006, respectively.

Given our focus on our Cable Solutions segment, weanticipate that our Cable Solutions segment sales and marketing workforce willincrease in future periods as we increase our efforts to penetrate the CableSolutions market and meet our customer demands.

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Sales and marketing expenses for our WirelessSolutions segment were approximately $89,000 and $245,000 in the three and thesix months ended June 30, 2007, respectively. For the three and the six monthsended June 30, 2006, the sales and marketing expenses for our WirelessSolutions segment were $768,000 and $1,867,000, respectively. The decrease inthe expenses for our Wireless Solutions segment in the three and six monthsended June 30, 2007 compared to the same period in  2006 resulted from a decrease in the salesand marketing workforce of our Wireless Solutions segment following theequipment agreement signed with ANI and our focus on our Cable Solutionssegment. During the three months ended June 30, 2006, we relocated our wirelesssales and marketing department from Palo Alto, California to Norcross, Georgia,and decreased our workforce. Given this reduction in workforce, we anticipatethat our sales and marketing expenses of our Wireless Solutions segment willcontinue to decrease in future periods.

***Generaland Administrative***

General and administrative expenses were $2,274,000and $1,949,000 during the three months ended June 30, 2007 and 2006,respectively. Of these expenses, approximately $1,493,000 and $287,000 werefrom our Cable Solutions segment and approximately $781,000 and $1,662,000 werefrom our Wireless Solutions segment during the three months ended June 30, 2007and 2006, respectively. For the six months ended June 30, 2007 and 2006,general and administrative expenses were $4,321,000 compared to $4,944,000,respectively. Of these expenses, approximately $3,013,000 and $572,000 werefrom our Cable Solutions segment and approximately $1,308,000 and $4,372,000were from our Wireless Solutions segment during the six months ended June 30,2007 and 2006, respectively. General and administrative expenses consistedprimarily of personnel and related costs for general corporate functions,including finance, accounting, implementation of the Sarbanes-Oxley Act of2002, strategic and business development and legal.

The increase in general and administrative expensesduring the three months ended June 30, 2007 compared to the three months endedJune 30, 2006 was primarily due to increases in (a) non-cash expensesrelated to stock option grants of $777,000 compared to $536,000, (b) salaries,compensation and recruiting fees from $637,000 to $739,000 and (c) professionalfees and subcontracting services of $387,000 compared to $280,000, mostlyrelated to our implementation of internal controls over financial reportingrequired by the Sarbanes-Oxley Act of 2002. These increases were partly offsetby receipt of $130,000 during the three months ended June 30, 2007, related toold debt which we previously recognized as bad debt.

The decrease in general and administrative expensesduring the six months ended June 30, 2007 compared to the six months ended June30, 2006 was primarily due to (a) decreased charges for stock-basedcompensation from $1,817,000 to $1,224,000, (b) decreased income tax expensesfrom $260,000 to $103,000 and (c) receipt of $130,000 during the six monthsended June 30, 2007, related to old debt which we previously recognized as baddebt. These decreases were partly offset by increased expenses for salaries,compensation and recruiting fees of $1,797,000 compared to $1,614,000 duringthe six months ended June 30, 2007 and 2006, respectively.

We expect general and administrative expenses to behigher in the future as we continue to implement internal controls overfinancial reporting as required by the Sarbanes-Oxley Act of 2002 and toexecute our strategic plans and business development efforts.

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

“Financial Income (expense), net” includes interestand investment income, foreign currency remeasurement gains and losses. Netinterest expense was $381,000 and $4,299,000 for the three and six months endedJune 30, 2007, respectively, compared to net interest expense of $345,000 and$614,000 for the three and six months ended June 30, 2006, respectively. As aresult of the extinguishment of the 2006 Convertible Note and Senior SecuredNote, we recorded $3,263,000 in the six months ended June 30, 2007 as financialexpenses consisting of $2,231,000 of unamortized accretion and $1,032,000 ofunamortized issuance expenses. In addition we had increased interest expensesdue to our amended Syntek Promissory Note, 2006 Convertible Note and SeniorSecured Note. These increases were partially offset by interest income derivedmainly from our cash and short-term investment balances.

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We will incur increased interest expenses for theremainder of 2007 and beyond due to long-term debt issued in the 2007 Financingin which the 2007 Convertible Note bears an annual interest rate of 5% and theamortization of deferred expenses incurred as part of the 2007 Financing.Interest expenses also will increase given the accretion to the value of the$6,500,000 amended Syntek Promissory Note. We will record accretion of$2,533,000 throughout the term of the amended Syntek Promissory Note, unlessthe note is cancelled, of which we recorded $667,000 during the six monthsended June 30, 2007.

***IncomeTaxes***

As of December 31, 2006, our Israeli subsidiaries hadnet operating loss carryforwards of approximately $96,000,000. Thesecarryforwards have no expiration date.

Our Israeli subsidiaries have been granted “approvedenterprise” status for several investment programs. The approved enterprisestatus entitles these subsidiaries to receive tax exemption periods, rangingfrom two to six years, on undistributed earnings commencing in the year inwhich the subsidiaries attain taxable income. In addition, this approvedenterprise status provides a reduced corporate tax rate of between 10% to 25%(as opposed to the usual Israeli corporate tax rate of 29% for 2007) for theremaining term of the program on the program’s proportionate share of income.

Since our Israeli subsidiaries have not achieved taxableincome, the tax benefits periods have not yet commenced. The subsidiaries’losses are expected to offset certain future earnings of the subsidiariesduring the tax-exempt period; therefore, the utilization of the net operatinglosses will generate no tax benefits. Accordingly, deferred tax assets fromsuch losses have not been included in our 2006 annual consolidated financialstatements. The entitlement to the above benefits is conditioned upon thesubsidiaries fulfilling the conditions stipulated by the law, regulationspublished thereunder and the instruments of approval for the specificinvestments in approved enterprises.

**Liquidity,Capital Resources and Going Concern Considerations**

Our financialstatements are presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness. We have experienced significant losses and negative cash flows fromoperations since incorporation. For the six months ended June 30, 2007, we incurreda net loss of $15,725,000 and had an accumulated deficit of $280,301,000. Thisraises substantial doubt about our ability to continue as a going concern. Ourability to continue as a going concern will depend upon our ability to raiseadditional capital during the next 12 months or attain profitable operations.We are actively pursuing raising additional capital to fund our operationsalthough there is no assurance that such capital will be available to us. Inaddition, we are seeking to expand our revenue base by adding new customers andto further reduce expenses. Failure to secure additional capital or to expandour revenue base would result in depleting our available funds and not beingable to pay our obligations when they become due. The accompanying condensedconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from our possibleinability to continue as a going concern.

As of June 30, 2007, we had $26,265,000 of cash, cashequivalents and short-term investments.

During the six months ended June 30, 2007, net cashused in operations was $11,058,000, comprised mainly of our loss of $15,725,000,partially offset by (a) non-cash charges related to depreciation andamortization of $428,000, (b) stock-based compensation of $2,457,000, (c)financing expenses of $4,067,000 resulting from accretion of the amended SyntekPromissory Note, the 2006 Convertible Note and Senior Secured Note delivered inthe 2006 Financing and the 2007 Convertible Note delivered in the 2007Financing, (d) an increase of liability for employee rights upon retirement of$228,000 and (e) changes in other working capital accounts of $2,509,000.

During the six months ended June 30, 2006, net cashused in operations was $6,838,000, comprised mainly of our loss of $15,223,000,partially offset by (a) non-cash charges related to depreciation andamortization of $441,000, (b) financing expenses of $662,000 resulting fromaccretion of the amended Syntek Promissory Note, 2006 Convertible Note andSenior Secured Note, (c) stock-based compensation of $3,066,000, (d) anincrease of liability for employee rights upon retirement of $400,000 and (e)changes in other working capital accounts of $3,816,000.

During the six monthsended June 30, 2007, net cash provided by investing activities was $5,587,000comprised of sales and maturities of our short-term investments net of$5,000,000 in purchases of short-term investments and $580,000 in purchases ofproperty and equipment. During the six months ended June 30, 2006, net cashused by investing activities was $5,249,000 comprised mainly of the purchase ofshort-term investments, net of sales and maturities of our short-terminvestments.

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Financing activities inthe six months ended June 30, 2007 were approximately $19,226,000 related tothe 2007 Financing which included the 2007 Convertible Note and proceeds wereceived upon the exercise of stock options. Financing activities in the sixmonths ended June 30, 2006 were approximately $24,688,000 and related to (a)the 2006 Financing, which included the issuance of our common stock, the 2006Convertible Note, the Senior Secured Note and warrants to purchase our commonstock, net of issuance cost and (b) proceeds we received upon the exercise ofstock options. See note 7 above for additional information about the 2007Financing and the 2006 Financing.

We have purchase obligations to our suppliers thatsupport our operations in the normal cause of our business. The obligationsrequire us to purchase minimum quantities of the suppliers’ products at aspecified price. As of June 30, 2007 and December 31, 2006, we hadapproximately $3,197,000 and $1,136,000, respectively, of purchase obligations.These obligations are expected to become payable at various times through 2007.

**Forward-Looking Statements**

You should readManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in conjunction with the consolidated financial statements andaccompanying notes appearing elsewhere in our Quarterly Report on Form 10-Q.The matters addressed in Management’s Discussion and Analysis of FinancialCondition and Results of Operations, with the exception of the historicalinformation presented, contain forward-looking statements involving risks anduncertainties, as well as assumptions that, if they do not fully materialize orprove incorrect, could cause our business and results of operations to differmaterially from those expressed or implied by such forward-looking statements.Such forward-looking statements include:

·                  our belief that our ability to continue as a goingconcern will depend upon our ability to raise additional capital during the next 12 months or attain profitable operations;

·                  our belief that failure to secure additional capitalor to expand our revenue base would result in depleting our available funds andnot being able to pay our obligations when they become due;

·                  our expectation that we will record approximately$400,000 in a one-time cash severance payment and related expenses;

·                  our belief thatour most critical accounting policies include policies related to revenuerecognition, inventory, extinguishment of debt, fair value of financialinstruments, debt issuance costs and stock-based compensation;

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

·                  our anticipation that our revenues will remainconcentrated among a few customers for the foreseeable future;

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

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

·                  our anticipation that sales and marketing expensesof our Wireless Solutions segment will continue to decrease in future periodsgiven the reduction in our expenses related to the relocation of our sales andmarketing support facilities from California to Georgia and our generalde-emphasis of our Wireless Solutions segment;

·                  our expectation that general and administrativeexpenses will be higher in the future as we continue to implement internalcontrols over financial reporting as required by the Sarbanes-Oxley Act of 2002and to execute our strategic plans and business development efforts;

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

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

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You can identify theseand other forward-looking statements by the use of words such as “may,” “will,”“should,” “could,” “intend,” “expect,” “plan,” “estimate,” “project,” “anticipate,”“believe,” “potential,” “continue,” or the negative of such terms, or othercomparable terminology. The risks, uncertainties and assumptions referred toabove that could cause our actual results to differ materially from the resultsexpressed or implied by such forward-looking statements include those set forthunder Item 1A below and the risks, uncertainties and assumptions discussedfrom time to time in our other public filings and public announcements. Allforward-looking statements included in this document are based on informationavailable to us as of the date hereof, and we assume no obligation to updatethese forward-looking statements.

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

***We are exposed to financial market risks including changesin interest rates and foreign currency exchange rates. Substantially all of ourrevenue and capital spending is transacted in United States dollars, although asubstantial portion of the cost of our operations, relating mainly to ourpersonnel and facilities in Israel, is incurred in New Israeli Shekels. We havenot engaged in hedging transactions to reduce our exposure to fluctuations thatmay arise from changes in foreign exchange rates. In the event of an increasein inflation rates in Israel, or if appreciation of the New Israeli Shekelsoccurs without a corresponding adjustment in our dollar-denominated revenues,our results of operation and business could be materially harmed.***

***As of June 30, 2007, we had cash, cash equivalents andshort-term investments of $26,265,000. Substantially all of these amountsconsisted of corporate and government fixed income securities and money marketfunds that invest in corporate and government fixed income securities that aresubject to interest rate risk. We place our investments with high creditquality issuers and by policy limit the amount of the credit exposure to anyone issuer.***

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

***While all our cash equivalents and short-term investmentsare classified as “available-for-sale,” we generally have the ability to holdour fixed income investments until maturity and therefore we would not expectour operating results or cash flows to be affected to any significant degree bythe effect of a sudden change in market interest rates on our securitiesportfolio. We may not be able to obtain similar rates after maturity as aresult of fluctuating interest rates. We do not hedge any interest rateexposures.***

**Quantitative Interest RateDisclosure as of June 30, 2007**

***If market interest rates were to increase on June 30, 2007immediately and uniformly by 10%, the fair value of the portfolio would declineby approximately $37,000, or approximately0.15% of the total portfolio (approximately 0.09% of total assets). Assumingthat the average yield to maturity on our portfolio at June 30, 2007 remainsconstant throughout the second quarter of 2007 and assuming that our cash, cashequivalents and short-term investments balances at June 30, 2007 remainconstant for the duration of the third quarter of 2007, interest income for thethird quarter of 2007 would be approximately $307,000. Assuming a decline of10% in the market interest rates at June 30, 2007, interest income for thethird quarter of 2007 would be approximately $331,000, which represents adecrease in interest income of approximately $12,000. The decrease in interestincome will result in a decrease of the same amount to net income and cash flowsfrom operating activities for the six months ended June 30, 2007. These amountsare determined by considering the impact of the hypothetical interest rates onour cash equivalents and available-for-sale securities at June 30, 2007 overthe remaining contractual lives.***

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

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, our disclosure controls and procedures were effective toensure that information we are required to disclose in reports that we fileunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission rules andforms.

Therehave not been any changes in our internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the fiscal quarter to which this report relates that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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

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

Our business issubject to substantial risks, including the risks described below.

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

We have incurredsignificant losses since our inception, and we expect to continue to incurlosses for the foreseeable future. We incurred losses of $15,725,000 for thesix months ended June 30, 2007 and as of that date our accumulated deficit was$280,301,000. Our revenues and gross margins may not grow or even continue attheir current levels and may decline even further. If our revenues do notrapidly increase, or if our expenses increase at a greater pace than ourrevenues, we will never become profitable.

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

On March 28,2007, we closed the 2007 Financing of $35,000,000 with Goldman,Sachs & Co., as further described in note 7. In the 2007 Financing, wedelivered the 2007 Convertible Note, $17,500,000 of which was used to payoffthe outstanding 2006 Convertible Note and the Senior Secured Note issued toGoldman, Sachs & Co. in the 2006 Financing. Following this pay off andpayment of issuance expenses, our net proceeds were approximately $17,350,000.Notwithstanding the 2007 Financing, we may need additional capital to executeour business plan. If we are unsuccessful in securing additional cash, eitherthrough additional equity and/or debt financings or increased revenues, we maynot be able to successfully execute our business plan.

**Since wehave recently reduced our workforce, our research and development efforts couldbe harmed.**

We recentlyimplemented a cost reduction program by reducing our workforce. The fullimplementation of this program resulted in a reduction of our workforce ofapproximately 16% (when compared to the workforce levels as of June 30, 2007).This reduction will have the largest effect on our research and developmentactivities. Our ability to further develop and market our products may belimited if we have not accurately predicted the appropriate workforcerequirements for our research and development efforts.

These reductionsare in addition to a cost reduction program in 2005. In this regard, we arecurrently experiencing difficulty in hiring skilled research and developmentpersonnel in Israel for our Cable Solutions segment. If this difficultycontinues in the foreseeable future, our research and development efforts wouldbe harmed.

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

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

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

In this regard,our inventory increased substantially in 2005 because sales were substantiallyless than our anticipated demand and we were required to make advance inventorypurchase commitments for anticipated sales. Accordingly, we recorded a writedown of inventory and non-cancelable purchase commitments of $424,000 and$2,050,000 for the years ended December 31, 2006 and 2005, respectively.For the three and six months ended June 30, 2007, we recorded a write downof inventory of $136,000.

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

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

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

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

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

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

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

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

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

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

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

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

We have not yetproduced our UltraBand solutions in high volumes and there may be challengesand unexpected delays, such as quality control issues, in our attempts toincrease volume and lower production costs. Our long-term success depends onour ability to produce high quality products at a low cost and, in particular,to reduce the production cost of our cable products designed for residentialuse.

Because we havenot yet deployed our UltraBand solutions in high volumes, there is significanttechnology risk associated with any such future deployment. We cannot be surethat any such high volume deployment would be successful.

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**Our futuregrowth depends on market acceptance of several emerging broadband services, onthe adoption of new broadband technologies and on several other broadbandindustry trends.**

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

Furthermore, othertechnological, industry and regulatory trends will affect the growth of ourbusiness. These trends include the following:

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

·                                          theuse of digital video by businesses and governments;

·                                          theprivatization of state owned telecommunication companies in other countries;

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

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

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

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

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

To develop suchchannels and market and sell our cable products, we need to grow our sales andmarketing team. It may be difficult for us to hire and retain additionalqualified personnel. Integrating new personnel, particularly UnitedStates-based personnel, may be challenging from a culture and logisticsperspective because most of our employees currently are based in Israel.

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

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

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

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

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

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

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

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

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

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

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

A relatively smallnumber of customers account for a large percentage of our revenues, as setforth in the table below:
| ** **                 | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A,  related party |       | 79                                              | %          | 94                                            | %          | 64 | % | 86 | % |
| Customer B                 |       | 19                                              | %          | 4                                             | %          | 34 | % | 10 | % |

 

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

In this regard,sales to Customer A in the year ended December 31, 2006 accounted for thevast majority of our sales during that year. This customer was formed in 2006and has a very limited history of operations, profitable or otherwise. If thiscustomer is not successful in operating its business, or if sales to thiscustomer are lower than our expectations, our wireless business could beharmed. Notwithstanding the foregoing, as sales to Customer A were made by ourWireless Solutions segment, if this customer is not successful, the effect tous will be tempered given the refocus of our internal resources on our CableSolutions segment. In this regard, we expect that a significant source of ourrevenues in the coming years will be derived from our Cable Solutions segmentrather than our Wireless Solutions segment.

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We have designedproducts for our Wireless Solutions segment to meet the specifications ofCustomer A based on that customer’s assessment of the utility sector. Sales inour Wireless Solutions segment could be adversely affected if Customer A hasnot accurately assessed the needs of the utility sector.

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

We may exploreinvestments in or acquisitions of other companies, products or technologies,including companies or technologies that are not complementary or related toour current solutions. We ultimately may be unsuccessful in operating and/orintegrating an acquired company’s personnel, operations, products and technologiesinto our business. These difficulties may disrupt our ongoing business, divertthe time and attention of our management and employees and increase ourexpenses.

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

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

Demand for ourproducts will depend on the size and timing of capital expenditures bytelecommunications service providers and MSOs. These capital spending patternsare dependent upon factors including:

·                                          theavailability of cash or financing;

·                                          budgetaryissues;

·                                          regulationand/or deregulation of the telecommunications industry;

·                                          competitivepressures;

·                                          alternativetechnologies;

·                                          overalldemand for broadband services, particularly relatively new services such asVoIP;

·                                          industrystandards;

·                                          thepattern of increasing consolidation in the industry; and

·                                          generalconsumer spending and overall economic conditions.

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

**Ourparticipation or lack of participation in industry standards groups may adverselyaffect our business.**

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

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

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

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

There has beensignificant price erosion in the broadband equipment field. We expect thatcontinued price competition among broadband access equipment and systemssuppliers will reduce our gross margins in the future. We anticipate that theaverage selling prices of broadband access systems will continue to decline asproduct technologies mature. We may be unable to reduce our manufacturing costsin response to declining average per unit selling prices. Our competitors maybe able to achieve greater economies of scale and may be less vulnerable to theeffects of price competition than we are. These declines in average sellingprices will generally lead to declines in gross margins and profitability forthese systems. If we are unable to reduce our costs to offset declines inaverage selling prices, we may not be able to achieve or maintainprofitability.

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

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

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

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

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

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

·                                          reductionsin pricing by us or our competitors;

·                                          globaleconomic conditions;

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

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

·                                          anyacquisitions or dispositions we may effect.

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

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

Our research anddevelopment facilities are located in Israel. Our reliance on internationalsales, operations and suppliers exposes us to foreign political and economicrisks, which may impair our ability to generate revenues. These risks include:

·                                          economic,inflation and political instability;

·                                          terroristacts, international conflicts and acts of war;

·                                          ourinternational customers’ ability to obtain financing to fund their deployments;

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·                                          changesin regulatory requirements and licensing frequencies to service providers;

·                                          importor export licensing requirements and tariffs;

·                                          laborshortages or stoppages;

·                                          traderestrictions and tax policies; and

·                                          limitedprotection of intellectual property rights.

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

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

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

One of ourdirectors and a majority of our employees are based in Israel, and many of themare currently obligated to perform annual reserve duty and are subject to beingcalled to active duty at any time under emergency circumstances. We cannotassess the full impact of these requirements on our workforce or business ifconditions should change, and we cannot predict the effect on us of anyexpansion or reduction of these obligations.

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

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

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

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

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

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

The market forbroadband access equipment and systems is intensely competitive, rapidlyevolving and subject to rapid technological change. The main competitivefactors in our markets include:

·                                          productperformance, features and reliability;

·                                          price;

·                                          stability;

·                                          scopeof product line;

·                                          salesand distribution capabilities;

·                                          technicalservice and support;

·                                          relationships,particularly those with system integrators and operators; and

·                                          industrystandards.

Certain of ourcompetitors and potential competitors have substantially greater financial,technical, distribution, marketing and other resources than we have and,therefore, may be able to respond more quickly to new or changingopportunities, technologies and other developments. In addition, many of ourcompetitors have longer operating histories, greater name recognition, broaderproduct lines and established relationships with system integrators and serviceproviders. Our primary competitors are Cisco Systems, Inc. through theirScientific Atlanta subsidiary; Motorola, Inc.; BigBandNetworks, Inc.; C-Cor Incorporated and Narad Networks, Inc. Most ofthese competitors have existing relationships with one or more of ourprospective customers. In the cable industry, our cable offerings facecompetition from technologies such as digital set-top boxes, high-endcompression technologies and DVRs. For our broadband wireless offerings, weface competition from technologies such as digital subscriber line, fiber andcable. Furthermore, the move toward open standards may increase the number ofoperators who will offer new services, which in turn may increase the number ofcompetitors and drive down the capital expenditures per subscriber deployed. Wemay not be able to compete successfully against our current and futurecompetitors, and competitive pressures could seriously harm our business.

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

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

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

We currently haverelationships with a limited number of contract manufacturers for themanufacturing of our products, substantially all of whom are located in Israeland Taiwan. These relationships may be terminated by either party with littleor no notice. If our manufacturers are unable or unwilling to continue manufacturingour systems in required volumes, we would have to identify qualifiedalternative manufacturers, which would result in delays causing our results ofoperations to suffer. Our limited experience with these manufacturers and lackof visibility as to the manufacturing capabilities of these companies if ourvolume requirements significantly increase does not provide us with a reliablebasis on 

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which to project theirability to meet delivery schedules, yield targets or costs. If we are requiredto find alternative manufacturing sources, we may not be able to satisfy ourproduction requirements at acceptable prices and on a timely basis, if at all.Any significant interruption in supply would affect the allocation of systemsto customers, which in turn could seriously harm our business. In addition, wecurrently have no formal written agreement with a manufacturer for our modemproducts. Our current inventory of modems is unlikely to fulfill anticipateddemand, and we will therefore be required to find a manufacturer in the nearfuture. Our inability to enter into an agreement with a manufacturer for ourmodems would harm our business.

In addition tosales to system integrators, we also sell in some instances directly to serviceproviders. Such direct sales require us to resell equipment to serviceproviders manufactured by third party suppliers and to integrate this equipmentwith the equipment we manufacture. We are particularly dependent on third partyradio suppliers in selling our 3.5GHz and other products. We currently havelimited relationships with third party suppliers. If we are unable to establishmeaningful relationships with suppliers, or if these suppliers are unable toprovide equipment that meets the specifications of our customers on the deliveryschedules required by our customers, and at acceptable prices, our businesswould be substantially harmed.

Our UltraBandsolutions are implemented over the HFC plant and, as such, they interface andintegrate with existing products from multiple other vendors. Future offeringsby these vendors may not be sufficiently compatible with our UltraBandsolutions. In addition, we depend on the continuous delivery of components byvarious manufacturers of electronic connectors, filters, boards and transistors.

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

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

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

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

·                                    supplierscould increase component prices significantly and with immediate effect;

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

·                                    supplierscould discontinue the manufacture or supply of components used in our systems.In such event, we might need to modify our systems, which may cause delays inshipments, increased manufacturing costs and increased systems prices; and

·                                    wemay hold more inventory than is immediately required to compensate for potentialcomponent shortages or discontinuation.

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

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

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

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

Delays andshortages in the supply of components are typical in our industry. We have experiencedminor delays and shortages on more than one occasion. In addition, if worldwidemanufacturing capacity does not rise along with a rise in demand, oursubcontract manufacturers could allocate available capacity to larger customersor to customers that have long-term supply contracts in place.

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

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

Third partiescould assert, and it could be found, that our technologies infringe theirproprietary rights. We could incur substantial costs to defend any litigation,and intellectual property litigation could force us to do one or more of thefollowing:

·                                          obtainlicenses to the infringing technology;

·                                          paysubstantial damages under applicable law;

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

·                                          expendsignificant resources to develop non-infringing technology.

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

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

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

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

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

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

The emergence orevolution of regulations and industry standards for broadband products, throughofficial standards committees or widespread use by operators, could require usto modify our systems, which may be expensive and time-consuming, and to incursubstantial compliance costs. Radio frequencies are subject to extensiveregulation under the laws of the United States, foreign laws and internationaltreaties. Each country has different regulations and regulatory processes forwireless communications equipment and uses of radio frequencies. Failure by theregulatory authorities to allocate suitable, sufficient radio frequencies topotential customers in a timely manner could result in the delay or loss ofpotential orders for our systems and seriously harm our business.

Some of ourproducts and technology are subject to export control laws and regulations. Weare subject to the risk that more stringent export control requirements couldbe imposed in the future on product classes that include products exported byus, which would result in additional compliance burdens and could impair theenforceability of our contract 

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rights. We may not beable 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 andenhancements to our products. Any revocation or expiration of any requisitelicense, the failure to obtain a license for product modifications andenhancements, or more stringent export control requirements could seriouslyharm our business.

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

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

As a publiccompany, our systems of internal controls over financial reporting are requiredto comply with the standards adopted by the Securities and Exchange Commission(“SEC”) and the Public Company Accounting Oversight Board (the “PCAOB”). We willbe required to make our first annual certification on our internal controlsover financial reporting in our annual report for the fiscal year endedDecember 30, 2007. In preparing for such certification, we are evaluatingour internal controls for compliance with applicable SEC and PCAOBrequirements, and we may be required to design enhanced processes and controlsto address issues identified through this review. This could result insignificant delays and cost to us and require us to divert substantial resources,including management time, from other activities. We have commenced a review ofour existing internal control structure and may need to hire additionalpersonnel. Although our review is not complete, we are taking steps to improveour internal control structure by dedicating internal resources to analyze andimprove our internal controls, to be supplemented periodically with outsideconsultants as needed. However, if we fail to achieve and maintain the adequacyof our internal controls, we may not be able to conclude that we have effectiveinternal controls over financial reporting as of the end of our 2007 fiscalyear. Moreover, although our management will continue to review and evaluatethe effectiveness of our internal controls, we can give no assurance that therewill be no material weaknesses in our internal control over financialreporting. We may in the future have material weaknesses or other controldeficiencies in our internal control over financial reporting as a result ofour controls becoming inadequate due to changes in conditions, the degree ofcompliance with our internal control policies and procedures deteriorating, orfor other reasons. If we have significant deficiencies or material weaknessesor other control deficiencies in our internal control over financial reporting,our ability to record, process, summarize and report financial informationwithin the time periods specified in the rules and forms of the SEC will beadversely affected. This failure could materially and adversely impact ourbusiness, our financial condition and the market value of our securities.

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

**Oursuccess depends significantly on Davidi Gilo, our Chairman of the Board of Directors,and Wayne H. Davis, our Chief Executive Officer, the loss of either of whomcould seriously harm our business.**

Our future successdepends in large part on the continued services of our senior management andkey personnel. In particular, we significantly depend on the services of DavidiGilo, our Chairman of the board of directors, and Wayne H. Davis, our ChiefExecutive Officer. We do not carry key person life insurance on our seniormanagement or key personnel. Any loss of the services of Messrs. Gilo orDavis or other members of senior management or other key personnel couldseriously harm our business.

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

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

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

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

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

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

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

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

**Severalof our directors and certain officers have relationships with Davidi Gilo andhis affiliated companies that could be deemed to limit their independence.**

Several members ofour board of directors, Lewis Broad, Neill Brownstein, Avraham Fischer, SamuelKaplan and Alan Zimmerman and certain of our officers, have had professionalrelationships with Davidi Gilo, our Chairman of the board of directors andformer Chief Executive Officer, and his affiliated companies for several years.These members of our board of directors previously served on the boards ofdirectors of DSP Communications, Inc. and/or DSP Group, Inc., ofwhich Mr. Gilo was formerly the controlling stockholder and the Chairmanof the board. In addition, Avraham Fischer is a senior partner of the law firmof Fischer, Behar, Chen & Co., which represents us on matters relatingto Israeli law, is an investor and co-chief executive officer of an Israeliinvestor group in which Mr. Gilo was an investor until October 2005,and is co-chief executive officer and a director of Clal Industries andInvestments, Ltd., which has made a significant investment in ANI, arelated party of our company. The long-term relationships between thesedirectors and officers and Mr. Gilo and his affiliated companies could beconsidered to limit their independence.

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

As of June 30,2007, our management collectively owned approximately 32.88% of our outstandingcommon stock (based on the number of shares owned by these individuals and thenumber of shares issuable upon exercise of options within 60 days of June30, 2007).

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As a result, thesestockholders, acting together, will be able to control the outcome of allmatters submitted for stockholder action, including:

·                                          electingmembers to our board of directors;

·                                          approvingsignificant change-in-control transactions;

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

·                                          controllingour management and operations.

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

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

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

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

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

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

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

The market priceof our shares has been and likely will continue to be highly volatile and couldbe subject to wide fluctuations in response to numerous factors, including thefollowing:

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

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

·                                          introductionand adoption of new industry standards;

·                                          changesin financial estimates or recommendations by securities analysts;

·                                          changesin the market valuations of our competitors;

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

·                                          salesof our common stock.

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

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

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

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

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

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

Our Fifth Amendedand Restated Certificate of Incorporation and Amended and Restated Bylawscontain anti-takeover provisions that could make it more difficult for a thirdparty to acquire control of us, even if that change in control would bebeneficial to stockholders. Specifically:

·                                          ourboard of directors has the authority to issue common stock and preferred stockand to determine the price, rights and preferences of any new series ofpreferred stock without stockholder approval;

·                                          ourboard of directors is divided into three classes, each serving three-yearterms;

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

·                                          thereare limitations on who can call special meetings of stockholders;

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

·                                          advancenotice is required for nominations of directors and for stockholder proposals.

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

**It maybe difficult to enforce a judgment in the United States against us and certaindirectors.**

Two of ourdirectors are not residents of the United States, and a substantial portion ofour assets and the assets of these persons are located outside the UnitedStates. Therefore, it may be difficult to enforce a judgment obtained in theUnited States based upon the civil or criminal liabilities provisions of theUnited States federal securities laws against us or any of those persons or toeffect service of process upon these persons in the United States.

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**Item 4.****             Submission ofMatters to a Vote of Security Holders**

Weheld our annual meeting of stockholders on May 10, 2007, at which the followingmatters were voted upon and approved by the stockholders:

(a)           The election of four Class IDirectors to serve for a three-year term until the 2010 annual meeting ofstockholders.  The results were asfollows:
| Nominee          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Richard Bilotti  |       | 12,756,925 |       | 63,613       |       |
| James A. Chiddix |       | 12,756,925 |       | 63,613       |       |
| Avraham Fischer  |       | 12,671,360 |       | 149,178      |       |
| Davidi Gilo      |       | 12,736,692 |       | 93.946       |       |

 

Thefollowing persons also continue to serve as directors:  Margaret A Bellville, Ronn Benatoff, Lewis S.Broad, Neill H. Brownstein, Samuel L. Kaplan and Alan L. Zimmerman.

(b)           The approval of the Fifth Amended andRestated Certificate of Incorporation. The results were as follows:
| For:              |   | 12,711,308 |   |
|-------------------|--------|------------|--------|
| Against:          |   | 95,050     |   |
| Abstain:          |   | 14,180     |   |
| Broker Non-Votes: |   | —     |   |

 

(c)           The approval of the Fourth Amendedand Restated 2000 Employee and Consultant Equity Incentive Plan.  The results were as follows:
| For:              |   | 3,660,289 |   |
|-------------------|--------|-----------|--------|
| Against:          |   | 392,277   |   |
| Abstain:          |   | 10,389    |   |
| Broker Non-Votes: |   | 8,757,583 |   |

 

(d)           Ratification of the appointment ofKesselman & Kesselman CPAs (ISR), a member of PricewaterhouseCoopersInternational Limited, as the independent registered public accounting firm forthe year ending December 31, 2007.  Theresults were as follows:
| For:              |   | 12,753,154 |   |
|-------------------|--------|------------|--------|
| Against:          |   | 62,180     |   |
| Abstain:          |   | 5,204      |   |
| Broker Non-Votes: |   | —     |   |

 

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**Item 6.****            Exhibits**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                    |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                       |
| 3.1             |       | Fifth Amended and Restated Certificate of  Incorporation. Previously filed as an exhibit to our Quarterly Report on Form  10-Q for the period ended March 31, 2007, and incorporated herein by  reference. |
|            |       |                                                                                                                                                                                                       |
| 3.2             |       | Amended and Restated Bylaws. Previously filed as an  exhibit to our Quarterly Report on Form 10-Q for the period ended March 31,  2007, and incorporated herein by reference.                              |
|            |       |                                                                                                                                                                                                       |
| 4.1             |       | Reference is made to Exhibits 3.1 and 3.2 above.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                       |
| 31.1            |       | Certificate of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                         |
|            |       |                                                                                                                                                                                                       |
| 31.2            |       | Certificate of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                         |
|            |       |                                                                                                                                                                                                       |
| 32.1            |       | Certificate of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                             |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Date: August 14, 2007 |                                                       |       |   |   |   |   |
|-----------------------|------------------------------------------------------------|------------|--------|--------|--------|--------|
|                  |                                                       |       |   |   |   |   |
|                  |                                                       |       |   |   |   |   |
| **VYYO INC.**         | ** **                                                 | ** ** |   |   |   |   |
|                  |                                                       |       |   |   |   |   |
|                  |                                                       |       |   |   |   |   |
| By:                   | /s/ Wayne H. Davis                                         |       |   |   |   |
|                  | Wayne H. Davis, Chief  Executive Officer                   |       |   |   |   |
|                  | (Duly Authorized  Officer)                                 |       |   |   |   |
|                  |                                                       |       |   |   |   |
|                  |                                                       |       |   |   |   |
| By:                   | /s/ Robert K. Mills                              |       |   |   |   |
|                  | Robert K. Mills,  Chief Financial Officer        |       |   |   |   |
|                  | (Duly Authorized Officer  and Principal Financial Officer) |       |   |   |   |
|                       |                                                            |            |        |        |        |        |  |

 

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**EXHIBITINDEX**
| Exhibit  Number | ** ** | **Exhibit**                                                                                                                                                                                                |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                       |
| 3.1             |       | Fifth Amended and Restated Certificate of  Incorporation. Previously filed as an exhibit to our Quarterly Report on Form  10-Q for the period ended March 31, 2007, and incorporated herein by  reference. |
|            |       |                                                                                                                                                                                                       |
| 3.2             |       | Amended and Restated Bylaws. Previously filed as an  exhibit to our Quarterly Report on Form 10-Q for the period ended March 31,  2007, and incorporated herein by reference.                              |
|            |       |                                                                                                                                                                                                       |
| 4.1             |       | Reference is made to Exhibits 3.1 and 3.2 above.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                       |
| 31.1            |       | Certificate of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                         |
|            |       |                                                                                                                                                                                                       |
| 31.2            |       | Certificate of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                         |
|            |       |                                                                                                                                                                                                       |
| 32.1            |       | Certificate of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adapted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                             |

 

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