** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-Q**

| **(Mark One)** |
|----------------|
|           |
| **x**          | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     |   |   |
| ** **     |   | **For the  Quarterly Period Ended September 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                ** |

 

**CommissionFile 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 |
|---------------------------------|--------------------------|-------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o   No x

 

As of November 7, 2007, there were 18,639,220 sharesof Common Stock outstanding.

 

 

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**INDEX**

**VYYO INC.**
|                                                                                                                            |   | **Page No.** |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|
| PART I.  FINANCIAL INFORMATION                                                                                                  |   | 1                 |
|                                                                                                                            |   |              |
| Item 1.  Condensed Consolidated Financial Statements                                                                       |   | 1                 |
|                                                                                                                            |   |              |
| Condensed Consolidated Balance Sheets at  September 30, 2007 and December 31, 2006                                         |   | 1                 |
|                                                                                                                            |   |              |
| Condensed Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2007 and  September 30, 2006 |   | 2                 |
|                                                                                                                            |   |              |
| Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2007 and September 30, 2006            |   | 3                 |
|                                                                                                                            |   |              |
| Notes to  Condensed Consolidated Financial Statements                                                                           |   | 4                 |
|                                                                                                                            |   |              |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                       |   | 19                |
|                                                                                                                            |   |              |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                        |   | 28                |
|                                                                                                                            |   |              |
| Item 4.  Controls and Procedures                                                                                           |   | 29                |
|                                                                                                                            |   |              |
| PART II. OTHER INFORMATION                                                                                                      |   | 30                |
|                                                                                                                            |   |              |
| Item  1A. Risk Factors                                                                                                          |   | 30                |
|                                                                                                                            |   |              |
| Item 6.  Exhibits                                                                                                          |   | 45                |
|                                                                                                                            |   |              |
| SIGNATURES                                                                                                                      |   | 46                |

 

i

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**PART****I. FINANCIAL INFORMATION**

**Item 1.****           ****Condensed Consolidated FinancialStatements**

**Vyyo Inc.**

**Consolidated Balance Sheets**

**(In thousands of U.S. $, except sharedata)**
| ** **                                                                                                                                                                                                   | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                   | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current  Assets:**                                                                                                                                                                                         | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                   |       | $                            | 13,661     |                        | $          | 7,416 |   |
| Short-term  investments                                                                                                                                                                                      |       | 5,560                        |       | 11,272                      |       |
| Accounts  receivable trade, net:                                                                                                                                                                             |       |                         |       |                        |       |
| Related party  (note 3)                                                                                                                                                                                      |       | 1,193                        |       | 991                         |       |
| Other current  assets                                                                                                                                                                                        |       | 623                          |       | 194                         |       |
|                                                                                                                                                                                                         |       | 1,816                        |       | 1,185                       |       |
| Inventory, net  (note 2)                                                                                                                                                                                     |       | 2,145                        |       | 2,362                       |       |
| Other                                                                                                                                                                                                        |       | 2,067                        |       | 996                         |       |
| **Total  Current Assets**                                                                                                                                                                                    |       | 25,249                       |       | 23,231                      |       |
| **Long-Term  Assets:**                                                                                                                                                                                       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Restricted cash  (note 4)                                                                                                                                                                                    |       | 5,000                        |       | 5,000                       |       |
| Property and  equipment, net                                                                                                                                                                                 |       | 1,444                        |       | 1,676                       |       |
| Employee rights  upon retirement funded (note 6)                                                                                                                                                             |       | 1,319                        |       | 1,168                       |       |
| Debt issuance  cost, net                                                                                                                                                                                     |       | 135                          |       | 1,074                       |       |
| **TOTAL  ASSETS**                                                                                                                                                                                            |       | $                            | 33,147     |                        | $          | 32,149 |   |
| ** **                                                                                                                                                                                                   | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES  AND CAPITAL DEFICIENCY**                                                                                                                                                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current  Liabilities:**                                                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Accounts payable                                                                                                                                                                                             |       | $                            | 2,139      |                        | $          | 1,719 |   |
| Accrued  liabilities (note 5)                                                                                                                                                                                |       | 5,712                        |       | 7,877                       |       |
| Deferred  revenues, related party (note 3)                                                                                                                                                                   |       | 3,626                        |       | 3,795                       |       |
| **Total  Current Liabilities**                                                                                                                                                                               |       | 11,477                       |       | 13,391                      |       |
| ** **                                                                                                                                                                                                   | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Long-Term  Liabilities:**                                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Promissory note  (note 4)                                                                                                                                                                                    |       | 6,111                        |       | 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)                                                                                                                                                      |       | 2,776                        |       | 2,111                       |       |
| **Total  Liabilities**                                                                                                                                                                                       |       | 55,364                       |       | 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,  18,571,050 and 18,114,031 shares issued and outstanding at September 30, 2007  and December 31, 2006, respectively |       | 266,783                      |       | 260,966                     |       |
| Accumulated  other comprehensive gain (loss)                                                                                                                                                                 |       | 15                           |       | (3                          | )          |
| Accumulated  deficit                                                                                                                                                                                         |       | (289,015                     | )          | (264,576                    | )          |
| **Total  Capital Deficiency**                                                                                                                                                                                |       | (22,217                      | )          | (3,613                      | )          |
| **TOTAL  LIABILITIES AND CAPITAL DEFICIENCY**                                                                                                                                                                |       | $                            | 33,147     |                        | $          | 32,149 |   |

 

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

 

1

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**Vyyo Inc.**

**CondensedConsolidated Statements of Operations**

**(In thousands of U.S. $, exceptper share data)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **REVENUES**                                                                                 | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues (note  10)                                                                          |       | $                                                    | 1,026      |                                                | $          | 161 |   | $ | 1,842 |   | $ | 866 |   |
| Revenues,  related party (notes 3 and 10)                                                    |       | 1,560                                                |       | 953                                                 |       | 3,034 |   | 5,378 |   |
| **TOTAL  REVENUES**                                                                          |       | 2,586                                                |       | 1,114                                               |       | 4,876 |   | 6,244 |   |
|                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| **COST OF  REVENUES**                                                                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of products  sold                                                                       |       | 1,066                                                |       | 116                                                 |       | 2,077 |   | 486 |   |
| Cost of products  sold, related party                                                        |       | 1,492                                                |       | 812                                                 |       | 2,612 |   | 4,185 |   |
| Write down of  inventory                                                                     |       | 47                                                   |       | 169                                                 |       | 183 |   | 169 |   |
| Insurance  reimbursement for damaged inventory                                               |       | —                                               |       | —                                              |       | (101 | ) | — |   |
| **Total  Cost of Revenues**                                                                  |       | 2,605                                                |       | 1,097                                               |       | 4,771 |   | 4,840 |   |
| **GROSS  PROFIT**                                                                            |       | (19                                                  | )          | 17                                                  |       | 105 |   | 1,404 |   |
| **OPERATING  EXPENSES**                                                                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development                                                                    |       | 3,260                                                |       | 2,933                                               |       | 8,891 |   | 8,344 |   |
| Sales and  marketing                                                                         |       | 2,370                                                |       | 2,080                                               |       | 6,956 |   | 7,294 |   |
| General and  administrative                                                                  |       | 2,375                                                |       | 1,962                                               |       | 6,696 |   | 6,906 |   |
| **Total  Operating Expenses**                                                                |       | 8,005                                                |       | 6,975                                               |       | 22,543 |   | 22,544 |   |
| **OPERATING  LOSS**                                                                          |       | (8,024                                               | )          | (6,958                                              | )          | (22,438 | ) | (21,140 | ) |
| **FINANCIAL  INCOME**                                                                        |       | 199                                                  |       | 347                                                 |       | 853 |   | 949 |   |
| **FINANCIAL  EXPENSES** (consists primarily of expenses for extinguishment of  debt, note 7) |       | (822                                                 | )          | (836                                                | )          | (5,775 | ) | (2,052 | ) |
| **LOSS  BEFORE INCOME TAXES**                                                                |       | (8,647                                               | )          | (7,447                                              | )          | (27,360 | ) | (22,243 | ) |
| **INCOME  TAXES**                                                                            |       | (67                                                  | )          | (271                                                | )          | 2,921 |   | (728 | ) |
| **LOSS  FROM CONTINUING OPERATIONS**                                                         |       | (8,714                                               | )          | (7,718                                              | )          | (24,439 | ) | (22,971 | ) |
| **DISCONTINUED  OPERATIONS**                                                                 |       | —                                               |       | 48                                                  |       | — |   | 78 |   |
| **LOSS  FOR THE PERIOD**                                                                     |       | $                                                    | (8,714     | )                                                   | $          | (7,670 | ) | $ | (24,439 | ) | $ | (22,893 | ) |
| **LOSS  PER SHARE**                                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted:**                                                                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing  operations                                                                       |       | (0.47                                                | )          | (0.43                                               | )          | (1.33 | ) | (1.33 | ) |
|                                                                                         |       | (0.47                                                | )          | (0.43                                               | )          | (1.33 | ) | (1.33 | ) |
| **WEIGHTED  AVERAGE NUMBER OF SHARES**                                                       | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and  diluted                                                                           |       | 18,479                                               |       | 17,956                                              |       | 18,332 |   | 17,150 |   |

 

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

 

2

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**Vyyo Inc.**

**CondensedConsolidated Statements of Cash Flows**

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

**(Unaudited)**

 
| ** **                                                                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Loss for the  period                                                                                                     |       | $                                                   | (24,439    | ) | $ | (22,893 | ) |
| Adjustments to  reconcile loss to net cash used in operating activities:                                                 |       |                                                |       |   |   |
| Income and  expenses not involving cash flows:                                                                           |       |                                                |       |   |   |
| Depreciation and  amortization                                                                                           |       | 634                                                 |       | 645 |   |
| Accretion and  amortization of financing instruments, net                                                                |       | 4,440                                               |       | 1,043 |   |
| Stock-based  compensation, net                                                                                           |       | 3,763                                               |       | 4,248 |   |
| Capital gain on  sales of property and equipment                                                                         |       | (4                                                  | )          | — |   |
| Decrease  (increase) in assets and liabilities:                                                                          |       |                                                |       |   |   |
| Accounts  receivable, related party                                                                                      |       | (202                                                | )          | (813 | ) |
| Accounts  receivable, other                                                                                              |       | (429                                                | )          | 680 |   |
| Other current  assets                                                                                                    |       | (1,071                                              | )          | (316 | ) |
| Inventory                                                                                                                |       | 217                                                 |       | (319 | ) |
| Accounts payable                                                                                                         |       | 420                                                 |       | 11 |   |
| Accrued  liabilities                                                                                                     |       | (1,887                                              | )          | 1,338 |   |
| Deferred  revenues, related party                                                                                        |       | (169                                                | )          | 3,905 |   |
| Liability for  employee rights upon retirement                                                                           |       | 665                                                 |       | 514 |   |
| Net cash used in  operating activities                                                                                   |       | (18,062                                             | )          | (11,957 | ) |
|                                                                                                                     |       |                                                |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                                                                      |       | (682                                                | )          | (155 | ) |
| Purchase of  short-term investments                                                                                      |       | (24,669                                             | )          | (25,341 | ) |
| Proceeds from  sales and maturities of short-term investments                                                            |       | 30,399                                              |       | 19,143 |   |
| Proceed from  sale of property and equipment                                                                             |       | 6                                                   |       | — |   |
| Contributions to  severance pay funds                                                                                    |       | (151                                                | )          | (162 | ) |
| Net cash  provided by (used in) investing activities                                                                     |       | 4,903                                               |       | (6,515 | ) |
|                                                                                                                     |       |                                                |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from  exercise of stock options                                                                                 |       | 2,054                                               |       | 2,600 |   |
| 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                                                                               |       | 19,404                                              |       | 26,003 |   |
| Increase in cash  and cash equivalents                                                                                   |       | 6,245                                               |       | 7,531 |   |
| Cash and cash  equivalents at beginning of period                                                                        |       | 7,416                                               |       | 2,548 |   |
| Cash and cash  equivalents at end of period                                                                              |       | $                                                   | 13,661     |   | $ | 10,079 |   |
|                                                                                                                     |       |                                                |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Cash paid for  taxes                                                                                                     |       | $                                                   | 19         |   | $ | 2 |   |
| Cash paid for  interest                                                                                                  |       | $                                                   | 1,307      |   | $ | 610 |   |

 

*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.****                                     ****Basis of Presentation**

The accompanying unaudited condensed consolidatedfinancial statements of Vyyo Inc. have been prepared in accordance withgenerally accepted accounting principles in the United States (“GAAP”) forinterim financial information and with the instructions to the Quarterly Reporton Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and notes required by GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals, reclassifications and adjustments) considered necessary fora fair presentation have been included. Operating results for the 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 and negativecash flows from operations since its incorporation. For the nine months endedSeptember 30, 2007, the Company incurred a net loss of $24,439,000 and had anaccumulated deficit of $289,015,000. 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 six to 12 months or attain profitableoperations. The Company is 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 secureadditional capital or to expand its revenue base would result in the Companydepleting its available funds and not being able to pay its obligations whenthey become due. The accompanying condensed consolidated financial statementsdo not include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that may result from the possible inability of the Company tocontinue as a going concern.

**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 to Goldman, Sachs & Co. in March 2006 as described below. The 2007Financing resulted in net proceeds to the Company of approximately $17,350,000.See note 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 net proceedsto the Company of approximately $23,400,000. See note 7.

**CostReduction Program**

OnJuly 23, 2007, the Company’s management implemented a cost reduction program.In connection with this program, the Company reduced its workforce byapproximately 16% (when compared to the workforce levels as of June 2007) inthe third quarter of 2007. The Company recorded approximately $400,000 in aone-time cash severance payment and related expenses. This cost reduction didnot require the termination of any contractual obligations or require theCompany to incur other material associated costs.

**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.

 

4

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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 Israelicompany, and its wholly-owned, United States-based subsidiary, XtendNetworks 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.

**Summary of Significant Accounting Principles**

***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 

 

5

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maturitydate may be one year or more from the current balance sheet date. Interest,amortization of premiums, accretion of discounts and dividends on securitiesclassified as available-for-sale are also included in the Statements ofOperations as part of “Financial Income” or “Financial Expenses,” asapplicable.

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 nine months ended September 30, 2007 and2006, respectively. The Company recognized an other-than-temporary impairmentin its available-for-sale securities of $0 and $(42,000) for the three and ninemonths ended September 30, 2006, respectively, and realized losses of $0 and$31,000 for the three and nine months ended September 30, 2006, respectively.

***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 reported operating results.If actual market conditions are different than the Company’s assumptions,additional provisions may be required. The Company’s estimates of futureproduct demand may prove to be inaccurate, in which case the Company may haveunderstated or overstated the provision required for excess and obsoleteinventory. If the Company later determines that the inventory is overvalued,the Company would be required to recognize such costs in its cost of sales atthe time of such determination. If the Company later determines that theinventory is undervalued, the Company may have overstated its cost of sales inprevious periods and would be required to recognize additional operating incomeonly when the undervalued inventory was sold. During the three and nine monthsended September 30, 2007, the Company recorded an inventory valuationwrite-down of approximately $47,000 and $183,000, respectively. During thethree and nine months ended September 30, 2006, the Company recorded aninventory valuation write-down of approximately $169,000 and $169,000,respectively.

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. Under FASB 151, the Company is required torecognize abnormal idle facility expenses as current-period charges, and toallocate fixed production overhead expenses to inventory based on normalcapacity of the production 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 consisted of cash payments to legal advisors in thenine months ended September 30, 2007. Costs incurred in the issuance of the2006 Convertible Note and Senior Secured Note included warrants to purchaseshares of the Company’s common stock issued to the Company’s financial advisorand cash payments made to legal and financial advisors in the year endedDecember 31, 2006. In the year ended December 31, 2006, the Company determinedthe fair value of the warrants 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.

 

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***Extinguishment ofDebt***

In the 2007 Financing, the Company repaid the 2006Convertible Note and Senior Secured Note. The Company accounted for this repaymentas “extinguishment of debt” under Emerging Issues Task Force (“EITF”) 96-19, “Debtor’sAccounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”).The Company initially recorded the 2007 Convertible Note at its estimated fairvalue, and used that amount to determine the debt extinguishment loss of$3,263,000 resulting from recognition of $2,231,000 in unamortized accretionand $1,032,000 in unamortized issuance expenses related to the 2006 ConvertibleNote 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.

***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 September 30, 2007, the Company’s revenues from services werenot significant. The Company’s products are off-the-shelf products, sold “asis,” without further adjustment or installation. When establishing arelationship with a new customer, the Company also may sell these productstogether as a package, in which case the Company typically ships products atthe same time to the 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, if 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 arrangement involvingmultiple deliverables should be divided into separate units of accounting. TheCompany’s multiple deliverables arrangements are those arrangements with newcustomers in which the Company sells its products together as a package.Because the Company delivers these off-the-shelf products at the same time andthe four revenue recognition criteria discussed above are met at that time, theadoption of EITF 00-21 had no impact on the Company’s financial position orresults 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.

 

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***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 andpresented in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”),for all periods presented. All outstanding stock options and shares ofrestricted stock have been excluded from the calculation of the diluted lossper share because these securities are not dilutive for the presented periods.For the nine months ended September 30, 2007, the total number of shares ofcommon stock related to outstanding options, the 2007 Convertible Note,warrants issued in connection with the 2006 Financing and restricted stockexcluded from the calculations of diluted loss per share was 10,738,597. Forthe nine months ended September 30, 2006, the total number of shares of commonstock related to outstanding options, the 2006 Convertible Note, warrantsissued in connection with the 2006 Financing and restricted stock excluded fromthe calculations of diluted loss per share was 7,246,100.

 

***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 estimates 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 recognizes compensation cost for optionsgranted with service conditions that have graded vesting schedules using thegraded vesting attribution method.

The Company adopted 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, the Company recognizes compensation costover 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 Related to Accounting for Tax Effectsof Share-Based Payment Awards.” The Company adopted the alternative transitionmethod provided in this FASB staff position for calculating the tax effects ofstock-based compensation pursuant to SFAS 123(R). The alternativetransition method includes simplified methods to establish the beginningbalance of the additional paid-in capital pool related to the tax effects ofemployee stock-based compensation, which is available to absorb taxdeficiencies recognized after adoption of SFAS 123(R). As ofJanuary 1, 2006, the cumulative effect of the Company’s adoption ofSFAS 123(R) was not 

 

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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 revalues thefair value of the options granted over the related service periods andrecognizes the value over the vesting period using the Black-Scholes model.

The fair value of each stock option granted during thethree and nine months ended September 30, 2007 and 2006 was estimated at thedate of grant using the Black-Scholes, Monte Carlo and the binomial valuationmodels, using the following assumptions:
| ** **                             | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                             | ** ** | **2007**                          | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Black-Scholes  model assumptions:      |       |                              |       |                              |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | 4.23%-4.78%                       |       | 4.66%-5.10%                       |       | 4.23%-5.04% |   | 4.66%-5.21% |   |
| Weighted-average  expected life range  |       | 4.61-9.64                         |       | 2.50-5.00                         |       | 4.61-10.00 |   | 2.50-5.00 |   |
| Volatility  ranges                     |       | 0.62-0.76                         |       | 0.56-0.76                         |       | 0.62-0.76 |   | 0.56-0.76 |   |
| Dividend yields                        |       | —                            |       | —                            |       | — |   | — |   |
|                                   |       |                              |       |                              |       |   |   |   |   |
| Monte Carlo  model assumptions:        |       |                              |       |                              |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | —                            |       | —                            |       | — |   | 4.60% |   |
| Weighted-average  expected life range  |       | —                            |       | —                            |       | — |   | 5.3 |   |
| Volatility  ranges                     |       | —                            |       | —                            |       | — |   | 0.61 |   |
| Dividend yields                        |       | —                            |       | —                            |       | — |   | — |   |
|                                   |       |                              |       |                              |       |   |   |   |   |
| Binomial  valuation model assumptions: |       |                              |       |                              |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | 3.84%-5.10%                       |       | 4.95%-5.24%                       |       | 3.84%-5.16% |   | 4.66%-5.33% |   |
| Weighted-average  expected life range  |       | 0.56-7.39                         |       | 2.29-3.76                         |       | 0.56-7.52 |   | 2.29-5.00 |   |
| Volatility  ranges                     |       | 0.26-0.87                         |       | 0.41-0.86                         |       | 0.26-0.98 |   | 0.41-0.87 |   |
| Dividend yields                        |       | —                            |       | —                            |       | — |   | — |   |

 

***Recent AccountingPronouncements***

In February 2007, FASBissued 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 reportedin earnings. SFAS 159 will be effective for the Company beginningJanuary 1, 2008. The Company is currently evaluating the impact thatadoption of SFAS 159 would have on its consolidated financial statements.

In July 2006, FASB issuedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”). FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken, orexpected to be taken, in a tax return. FIN 48 requires the affirmativeevaluation that is more-likely-than-not, based on the technical merits of a taxposition, that an enterprise is entitled to economic benefits resulting from 

 

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positions taken in incometax returns. If a tax position does not meet the more-likely-than-notrecognition threshold, the benefit of that position is not recognized in thefinancial statements. FIN 48 also requires companies to disclose additionalquantitative and qualitative information in their financial statements aboutuncertain tax positions. The Company adopted FIN 48 on January 1, 2007, whichdid not have a material impact 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:

| ** **      | ** ** | **September 30, 2007**                      | ** ** | **December 31, 2006** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|----------------------------|------------|
| ** **      | ** ** | **(In thousands of U.S. $)** | ** ** |
| Raw materials   |       | $                                                | 441        |                       | $          | 395 |   |
| Work in process |       | 282                                              |       | 445                        |       |
| Finished goods  |       | 1,422                                            |       | 1,522                      |       |
|            |       | $                                                | 2,145      |                       | $          | 2,362 |   |

 

**3.****                                     ****Equipment PurchaseAgreement with Arcadian Networks, Inc. (Related Party)**

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 (both downstreamand upstream); (b) oil or gas exploration, manufacture, transportation ordistribution; (c) water utility; (d) chemical manufacture;(e) mining; (f) environmental monitoring or protection;(g) transportation facilities (including railroads); (h) bordercontrol; and (i) public safety. Specifically, the Company may sell itsproducts in the Relevant Territory to cable television customers.

The Company received an initial purchase order for$10,000,000 on March 31, 2006 (related to products to be purchased in 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 September 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 nine months ended September 30,2007, the Company recognized revenue of $1,560,000 and $3,034,000,respectively, under the ANI Agreement, which included income related to theexclusivity payment of $100,000 and $300,000, respectively, and productmaintenance of $82,000 and $205,000, respectively. For the three and ninemonths 

 

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endedSeptember 30, 2006, the Company recognized revenue of $953,000 and $5,378,000,respectively, which included income related to the exclusivity payment of$100,000 and $200,000, respectively, and product maintenance of $40,000 and$54,000, respectively. The Company will recognize the exclusivity payments fromANI over the 10-year term of the Purchase Agreement.

As of September 30, 2007, ANI’s outstanding accountsreceivable balance was $1,193,000 and the Company had deferred revenues fromANI sales of $3,626,000.

**4.****                                     ****Promissory Note**

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:

•                                          the maturitydate was extended by one year from March 31, 2007 to March 31, 2008;

•                                          the provisionthat would have allowed acceleration of the Syntek Promissory Note if the sumof the Company’s cash, cash equivalents, short-term investments and accountsreceivables, net of short- and long-term debt, was less than $20,000,000on December 31, 2005 or June 30, 2006 was waived; and

•                                          the Syntek Promissory Notewill be cancelled if:

(a)                                 the Company’srevenue (including that of all subsidiaries, except for newly-acquiredbusinesses) equals or exceeds $60,000,000 and gross margin equal orexceeds 35%, for the year ended December 31, 2007; or

(b)                                beginning on thefirst day that the Company’s common stock closes at or above $18.00 per shareand at any time thereafter, a sale by the holder of all of its Remaining Sharesat an average sales price at or above $18.00 per share. “Remaining Shares”means those shares of the Company’s common stock received by the holder inconnection with the Xtend acquisition; or

(c)                                 all of the RemainingShares are included in a successfully concluded secondary offering (onForm S-3 or otherwise) at an offering price at or above $18.00 per share inwhich the holder either (i) sells all of the Remaining Shares or(ii) is provided an opportunity to sell all of such shares into suchsecondary offering and elects not to sell, provided that the successfullyconcluded offering included no fewer than the number of Remaining Shares; or

(d)                                the receipt by theholder of a bona fide offer for the purchase of all of the Remaining Shares atan average sales price at or above $18.00 per share. A “bona fide” offer meansa fully-funded and unconditional offer for purchase by a buyer who has provableand sufficient financial resources to purchase all of the Remaining Shares forcash within a commercially reasonable period of time from the date of offer,not to exceed 30 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 

 

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the fair value of the amended Syntek Promissory Note at$3,967,000 and recorded this amount in the Balance Sheets as a long-termliability under “Promissory note.” The Company recorded $2,533,000, the differencebetween the value of the amended Syntek Promissory Note and the original SyntekPromissory Note, as “Gain Resulting from Amendment to Promissory Note” in theConsolidated Statements of Operations for the year ended December 31, 2005. Infuture periods the Company will record an accretion to the value of the amendedSyntek Promissory Note up to $6,500,000. The Company will record the accretionof $2,533,000 as finance expenses during the remaining term of the amendedSyntek Promissory Note, unless it is cancelled as provided above. For the threeand nine months ended September 30, 2007, the Company recorded $366,000 and$1,033,000, respectively, in financial expenses related to the accretion of theamended Syntek Promissory Note.

**5.****                                     ****Accrued Liabilities**

Accrued liabilities consist of the following:

| ** **                                    | ** ** | **September 30, 2007**                      | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **(In thousands of U.S. $)** | ** ** |
| Withholding tax*                              |       | $                                                | 453        |                       | $          | 3,321 |   |
| Compensation and  benefits                    |       | 2,282                                            |       | 1,995                      |       |
| Royalties                                     |       | 963                                              |       | 940                        |       |
| Professional  fees                            |       | 533                                              |       | 361                        |       |
| Deferred rent                                 |       | 342                                              |       | 354                        |       |
| Interest payable  to Goldman, Sachs & Co. |       | 292                                              |       | 285                        |       |
| Warranty**                                    |       | 174                                              |       | 66                         |       |
| Deferred  revenues                            |       | 107                                              |       | 66                         |       |
| Other                                         |       | 566                                              |       | 489                        |       |
|                                          |       | $                                                | 5,712      |                       | $          | 7,877 |   |

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* InJune 2007, the Company signed an agreement with its Israeli wholly-ownedsubsidiary to restructure its inter-company debt, whereby $77,139,000previously classified as an intercompany loan was replaced and converted into aconvertible capital note. The convertible capital note is convertible intoordinary shares of the wholly-owned subsidiary. Additionally, $17,062,000 ofaccrued interest on the loan was forgiven. Following the restructuring ofdebt 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 been providedfor as a liability in the Company’s financial statements. The reversal ofthe provision was recorded as income under “Income Taxes” in the ConsolidatedStatements of Operations for the nine months ended September 30, 2007.

** Thechanges in the warranty balances consist of the following:

| ** **                                     | ** ** | **Nine Months**                             | ** ** | ** **                 | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **Ended**                                        | ** ** | **Year Ended**        | ** ** |
| ** **                                     | ** ** | **September 30, 2007**                      | ** ** | **December 31, 2006** | ** ** |
| ** **                                     | ** ** | **(In thousands of U.S. $)** | ** ** |
| Balance at  beginning of period                |       | $                                                | 66         |                       | $          | 104 |   |
| Usage of  warranty                             |       | (19                                              | )          | (59                        | )          |
| Product warranty  issued for new sales         |       | 169                                              |       | 177                        |       |
| Changes in  accrual of warranty periods ending |       | (42                                              | )          | (156                       | )          |
| Balance at end  of period                      |       | $                                                | 174        |                       | $          | 66 |   |

 

 

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**6.****                                     ****Severance Liabilities**

The amounts paid related to severance and severance expenseswere:
| ** **                         | ** ** | **Three Months**                            | ** ** | **Nine Months**              | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **Ended September 30,**                | ** ** | **Ended September 30,** | ** ** |
| ** **                         | ** ** | **2007**                                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Amounts paid  related to severance |       | $                                                | 169        |                              | $          | 193 |   | $ | 745 |   | $ | 867 |   |
| Severance  expenses*               |       | $                                                | 531        |                              | $          | 224 |   | $ | 1,273 |   | $ | 1,186 |   |

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* With respect tothe Company’s Israeli employees, the Company expects to contribute $386,000 toa defined contribution plan and $205,000 to insurance and pension plans for theyear ended December 31, 2007(includes amounts contributed in the nine months ended September 30, 2007).

**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 nine months ended September 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 in full of the 2006 Convertible Note and SeniorSecured Note 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 SeniorSecured Note ($7,500,000 principal; 9.5% annual interest), and(d) warrants to purchase 298,617 shares of common stock. The transactionresulted in estimated net proceeds to the Company of approximately $23,400,000.

 

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TheCompany allocated the proceeds received in the 2006 Financing to the differentinstruments based on the relative fair value of each instrument as follows:

| ** **                                                               | ** ** | **Face value** | ** ** | **Relative fair  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 financial advisorand (b) approximately $417,000 for legal and other professional fees and costs.Of these estimated issuance costs, $806,000 and $385,000 were allocated to the2006 Convertible Note and the Senior Secured Note, respectively. These costswere amortized based on the effective interest amortization method through thefive-year term until maturity of the notes and recorded as interest expense,based on the effective interest method of amortization. The issuance costsdescribed above were allocated to the different instruments based on theirrelative fair values.

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 ofSeptember 30, 2007, the Company reservedapproximately 938,564 shares of common stock for issuance, upon exercise ofstock options and issuance of shares of restricted stock reserved under itsstock-based compensation plans. These shares are available for issuance underthe plans described below.

**StockOption Plans**

TheCompany has the following stock option plans: the 1999 Employee and ConsultantEquity Incentive Plan and the Fourth 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 September 30, 2007, 135,000 of thesestock options were forfeited. For the three and nine months ended September 30,2007 and 2006, the 

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Company recordedexpenses of $120,000 and $355,000, respectively, related to these stockoptions.

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 monthlyinstallments over 48 months. These stock options may be accelerated uponthe occurrence of specified events, including certain financing events, approvalof the Company’s products in identified cable companies or upon a “Change ofControl” (as defined in the related consulting agreement). For the three andnine months ended September 30, 2007, the Company recorded expenses of $129,000and $402,000, 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 shares vested upon the closing of theFinancing.

(b)                300,000 shares vest at such time as the per shareprice of the Company’s common stock closes at or above $10.44 for a period ofany 22 (consecutive or non-consecutive) trading days, so long as Mr. Giloremains an employee of or consultant to the Company on the 22nd day of suchperiod.

(c)                 300,000 shares vest at such time as the per shareprice of the Company’s common stock closes at or above $15.66 for a period ofany 22 (consecutive or non-consecutive) trading days, so long as Mr. Giloremains an employee of or consultant to the Company on the 22nd day of suchperiod.

The Companyrecorded stock-based compensation expenses of $0 and $750,000 for the three andnine months ended September 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 stock-basedcompensation expenses of $58,000 and $194,000 in the three and nine monthsended September 30, 2007, respectively, and $56,000 and $143,000 in the threeand nine months ended September 30, 2006, respectively. The Company determinedthese stock-based compensation expenses using the Monte Carlo valuation method.

**RestrictedStock**

Recipientsof shares of restricted stock are entitled to cash dividends, if paid, and tovote their shares throughout the restricted period. The shares are valued atthe market price on the grant date, and compensation is amortized ratably overthe vesting period. The Company must recognize compensation expenses for sharesof restricted stock subject to designated performance criteria if theperformance criteria are being attained or it is probable that they will beattained.

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Asummary of stock option plans, shares of restricted stock and relatedinformation, under all of the Company’s equity incentive plans as of September30, 2007 is as follows (in thousands of U.S. $, 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*                       |   | (2,291                                         | )      | 2,291                   |    | $                                      | 6.34   |                              | $      | 2.70 |   |
| Exercised                      |   | —                                         |   | (447                    | )  | $                                      | 4.59   |                              | — |   |
| Cancelled                      |   | 671                                            |   | (671                    | )       | $                                      | 6.27   |                              | — |   |
| Balance at  September 30, 2007 |   | 939                                            |   | 7,236                   |    | $                                      | 5.67   |                              |   |   |
|                                |        |                                                |        |                         |         |                                        |        |                                   |        |  |  |

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* Includes 220,000options granted to non-employee directors in the nine months ended September30, 2007 and 250,000 additional options granted to the Vice Chairman of theboard of directors who also serves as a consultant.

Thefollowing table summarizes information concerning outstanding and exercisableoptions under stock option plans as of September 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 of  U.S.$)** | ** ** | **(In years)**                                 | ** ** | ** ** | ** ** | **(In thousands of   U.S. $)** | ** ** | ** ** | ** ** |
| Plans:                                      |       |                                   |       |                                                |       |   |   |   |   |   |   |
| 0.10                                        |       | 114                                    |       | 3.14                                                |       | $ | 0.10 |   | 36 |   | $ | 0.10 |   |
| 0.99                                        |       | 1                                      |       | 1.20                                                |       | 0.99 |   | 1 |   | 0.99 |   |
| 2.27-3.40                                   |       | 562                                    |       | 3.45                                                |       | 3.23 |   | 439 |   | 3.20 |   |
| 3. 92-5.86                                  |       | 2,978                                  |       | 4.25                                                |       | 4.78 |   | 1,845 |   | 4.63 |   |
| 5. 99-8.43                                  |       | 3,482                                  |       | 4.55                                                |       | 6.90 |   | 987 |   | 7.09 |   |
| 9.00-10.50                                  |       | 99                                     |       | 2.25                                                |       | 9.72 |   | 19 |   | 9.60 |   |
|                                        |       | 7,236                                  |       | 4.29                                                |       | $ | 5.67 |   | 3,327 |   | $ | 5.15 |   |

 

**9.****                                     ****Comprehensive Loss**

Thecomponents of comprehensive loss are as follows:
| ** **                                               | ** ** | **Three Months  Ended September 30,**            | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                         | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(In thousands of U.S. $)** | ** ** |
| Loss                                                     |       | $                                                | (8,714     | )                                    | $          | (7,670 | ) | $ | (24,439 | ) | $ | (22,893 | ) |
| Unrealized gain  (loss) on available-for-sale securities |       | 22                                               |       | 7                                    |       | 15 |   | (2 | ) |
| Comprehensive  loss                                      |       | $                                                | (8,692     | )                                    | $          | (7,663 | ) | $ | (24,424 | ) | $ | (22,895 | ) |

 

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**10.****                              ****Segment Reporting**

TheCompany’s business is divided into two segments: “Cable Solutions” and “WirelessSolutions.”
| ** **                         | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)**          | ** ** |
| Consolidated  revenues from:       |       |                                  |       |                                 |       |   |   |   |   |
| Cable Solutions                    |       | $                                     | 1,026      |                                 | $          | 161 |   | $ | 1,813 |   | $ | 700 |   |
| Wireless  Solutions:               |       |                                  |       |                                 |       |   |   |   |   |
| Related party                      |       | 1,560                                 |       | 953                                  |       | 3,034 |   | 5,378 |   |
| Other                              |       | —                                |       | —                               |       | 29 |   | 166 |   |
|                               |       | 1,560                                 |       | 953                                  |       | 3,063 |   | 5,544 |   |
| Consolidated  revenues             |       | $                                     | 2,586      |                                 | $          | 1,114 |   | $ | 4,876 |   | $ | 6,244 |   |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Operating loss:                    |       |                                  |       |                                 |       |   |   |   |   |
| Cable Solutions                    |       | (5,987                                | )          | (3,610                               | )          | (17,860 | ) | (9,910 | ) |
| Wireless  Solutions                |       | (2,037                                | )          | (3,348                               | )          | (4,578 | ) | (11,230 | ) |
| Total  consolidated operating loss |       | (8,024                                | )          | (6,958                               | )          | (22,438 | ) | (21,140 | ) |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Financial income                   |       | 199                                   |       | 347                                  |       | 853 |   | 949 |   |
| Financial  expenses                |       | (822                                  | )          | (836                                 | )          | (5,775 | ) | (2,052 | ) |
| Income tax                         |       | (67                                   | )          | (271                                 | )          | 2,921 |   | (728 | ) |
| Loss from  continuing operations   |       | $                                     | (8,714     | )                                    | $          | (7,718 | ) | $ | (24,439 | ) | $ | (22,971 | ) |

 

Thefollowing provides information on the Company’s assets:
| ** **                                         | ** ** | **September 30, 2007**  | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Cash, cash  equivalents and short-term investments |       | $                            | 19,221     |                       | $          | 18,688 |   |
| Restricted cash                                    |       | 5,000                        |       | 5,000                      |       |
| Debt issuance  costs, net                          |       | 135                          |       | 1,074                      |       |
| Cable Solutions                                    |       | 4,152                        |       | 3,139                      |       |
| Wireless  Solutions                                |       | 4,639                        |       | 4,248                      |       |
|                                               |       | $                            | 33,147     |                       | $          | 32,149 |   |

 
| ** **                                         | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(In thousands of U.S. $)**          | ** ** |
| Expenditures for long-lived assets: |       |                                  |       |                                 |       |   |   |   |   |
| Cable Solutions                                    |       | $                                     | 65         |                                 | $          | 36 |   | $ | 295 |   | $ | 69 |   |
| Wireless  Solutions                                |       | 18                                    |       | 30                                   |       | 109 |   | 86 |   |
|                                               |       | $                                     | 83         |                                 | $          | 66 |   | $ | 404 |   | $ | 155 |   |
| Depreciation  expenses:                            |       |                                  |       |                                 |       |   |   |   |   |
| Cable Solutions                                    |       | $                                     | 149        |                                 | $          | 112 |   | $ | 449 |   | $ | 341 |   |
| Wireless  Solutions                                |       | 57                                    |       | 92                                   |       | 185 |   | 304 |   |
|                                               |       | $                                     | 206        |                                 | $          | 204 |   | $ | 634 |   | $ | 645 |   |

 

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Thefollowing is a summary of operations within geographic areas based on thelocation of the customers:
| ** **                                | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(In thousands of U.S. $)**          | ** ** |
| Revenues from  sales to customers in the: |       |                                  |       |                                 |       |   |   |   |   |
| Cable Solutions  segment:                 |       |                                  |       |                                 |       |   |   |   |   |
| North America                             |       | $                                     | 1,026      |                                 | $          | 161 |   | $ | 1,813 |   | $ | 700 |   |
| Wireless  Solutions segment:              |       |                                  |       |                                 |       |   |   |   |   |
| North America,  related party             |       | $                                     | 1,560      |                                 | $          | 953 |   | $ | 3,034 |   | $ | 5,378 |   |
| North America                             |       | —                                |       | —                               |       | — |   | 148 |   |
| Rest of the  world                        |       | —                                |       | —                               |       | 29 |   | 18 |   |
|                                      |       | $                                     | 1,560      |                                 | $          | 953 |   | $ | 3,063 |   | $ | 5,544 |   |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
|                                      |       | $                                     | 2,586      |                                 | $          | 1,114 |   | $ | 4,876 |   | $ | 6,244 |   |

 
|                          |   | **September 30,  2006**  |   | **December 31,  2006** |   |
|-------------------------------|--------|-------------------------------|--------|-----------------------------|--------|
|                          |   | **(In  thousands of U.S. $)** |   |
| Property and  equipment, net: |   |                          |   |                        |   |
| Israel                        |   | $                             | 861    |                        | $      | 1,008 |   |
| United States                 |   | 583                           |   | 668                         |   |
|                          |   | $                             | 1,444  |                        | $      | 1,676 |   |

 

Salesto major customers out of total revenues are as follows:
| ** **                 | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A,  related party |       | 60                                    | %          | 85                                   | %          | 62 | % | 86 | % |
| Customer B                 |       | 38                                    | %          | 14                                   | %          | 36 | % | 11 | % |

 

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**Item 2.****                                                          ****Management’s Discussionand 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 the condensed consolidated financial statementsand accompanying notes appearing elsewhere in this Quarterly Report on Form10-Q of Vyyo Inc. The matters addressed in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations, with the exceptionof the historical information presented, contain forward-looking statementsinvolving risks and uncertainties. Actual results could differ materially fromthose anticipated in these forward-looking statements as a result of certainfactors, including those set forth in Item 1A below and elsewhere in thisreport.

## **Overview**

Vyyo Inc. and itswholly-owned subsidiaries (collectively, “we,” “us” or “our”) provide cable andwireless broadband access solutions through two business segments: our “CableSolutions” segment and our “Wireless Solutions” segment. Our primary focus ison our Cable Solutions segment, and significantly all of our internal resourcesare focused on enhancing our visibility in and penetration of the cable market.The addition of James A. Chiddix as the Vice Chairman of our board of directors,Wayne H. Davis as our Chief Executive Officer, David Feldman as our ChiefTechnology Officer, and Robert K. Mills as our Chief Financial Officer, allwith substantial cable industry experience, validates our efforts and increasesour 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 Xtend Networks Ltd.,an Israeli company, and its wholly-owned, United States-based subsidiary, XtendNetworks Inc. (collectively, “Xtend”). We purchased all of the outstandingcapital stock of Xtend on June 30, 2004 and consolidated its operationswith our operations beginning July 1, 2004. For a discussion of ouracquisition of Xtend, see note 7 of our 2006 annual Consolidated FinancialStatements.

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 incurredsignificant losses and negative cash flows from operations since commencingoperations. For the nine months ended September 30, 2007, we incurred a netloss of $24,439,000 and had an accumulated deficit of $289,015,000. Thesematters raise substantial doubt about our ability to continue as a goingconcern. Our ability to continue as a going concern will depend upon our abilityto raise additional capital during the next six to 12 months or attainprofitable operations. We are pursuing raising additional capital to fund ouroperations although there is no assurance that such capital will be availableto us. In addition, we are seeking to expand our revenue base by adding newcustomers and to further reduce expenses. 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. 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 common stock, a convertible note, a seniorsecured 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 

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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 wereapproximately $23,400,000.

**CostReduction Program**

OnJuly 23, 2007, our management implemented a cost reduction program. Inconnection with this program, we reduced our workforce by approximately 16%(when compared to the workforce levels as of June, 2007) in the third quarterof 2007. We recorded approximately $400,000 in a one-time cash severancepayment and related expenses. This cost reduction did not require thetermination of any contractual obligations or require us to incur othermaterial 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 subjectivedecisions or assessments. We believe our most critical accounting principlesinclude the following:

***RevenueRecognition***

We generate revenues from sales of our products. As ofSeptember 30, 2007, our revenues from services were not significant. Ourproducts are off-the-shelf products, sold “as is,” without further adjustmentor installation. When establishing a relationship with a new customer, we alsomay sell 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, if thereis a right of return, customer acceptance provision or uncertainty aboutcustomer acceptance, we defer the associated revenue until we have evidence ofcustomer acceptance.

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 of operations.

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 than 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 costs 

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in our costs of sales atthe time of such determination. If we later determine that our inventory isundervalued, we may have overstated our costs of sales in previous periods andwould be required to recognize additional operating income only when theundervalued inventory was sold. During the three and nine months endedSeptember 30, 2007, we recorded an inventory valuation write-down ofapproximately $47,000 and $183,000, respectively. During the three and ninemonths ended September 30, 2006, we recorded an inventory valuation write-downof approximately $169,000 and $169,000, respectively.

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 expenses 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 its estimated fair value, and we used that amount to determine the debtextinguishment loss of $3,263,000 resulting from recognition 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***

The costs we incurred inthe issuance of the 2007 Convertible Note consisted of cash payments to legaladvisors in the nine months ended September 30, 2007. Costs incurred in theissuance of the 2006 Convertible Note and the Senior Secured Note includedwarrants to purchase shares of our common stock issued  to our financial advisor and cash paymentsmade to legal and financial advisors in the year ended December 31, 2006. Inthe year ended December 31, 2006, we determined the fair value of the warrantsbased on the Black-Scholes option-pricing model. Issuance costs are deferredand amortized as a component of interest expense over the period from issuancethrough 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.

Effective January 1,2006, we adopted Statement of Financial Accounting Standards (“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 estimate forfeitures based on historical experienceand anticipated future conditions. We use the Monte Carlo valuation model 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 

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correspond to currentperiod presentation within the same operating expense line items as cashcompensation paid to employees.

We recognize compensationcost for options granted with service conditions that have graded vestingschedules using the graded vesting attribution method.

We adopted the modifiedprospective transition method permitted by SFAS 123(R). Under thistransition method, we implemented SFAS 123(R) as of the first quarter of2006 with no restatement of prior periods. The valuation provisions ofSFAS 123(R) apply to new awards and to awards modified, repurchased or cancelledafter January 1, 2006. Additionally, we recognize compensation cost overthe remaining service period for the portion of awards for which the requisiteservice has not been rendered using the grant-date fair value of those awardsas calculated for pro forma disclosure purposes under SFAS 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 adopted the alternative transition method provided in SFAS 123(R)-3 forcalculating the tax effects of stock-based compensation pursuant toSFAS 123(R). The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in capital pool relatedto the tax effects of employee stock-based compensation, which is available toabsorb tax deficiencies recognized after adoption of SFAS 123(R).  As of January 1, 2006, the cumulativeeffect of our adoption of SFAS 123(R) was not material.

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.” We revalue the fair value ofthe options granted over the related service periods and recognize the valueover the vesting period, using the Black-Scholes model.

Expense related to stock-basedcompensation is included in the following line items in the Statements ofOperations:
| ** **                  | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(In thousands of U.S. $)**          | ** ** |
| Cost of revenues            |       | $                                     | 17         |                                 | $          | 24 |   | $ | 50 |   | $ | 60 |   |
| Research and  development   |       | $                                     | 162        |                                 | $          | 228 |   | $ | 449 |   | $ | 667 |   |
| Sales and  marketing        |       | $                                     | 523        |                                 | $          | 426 |   | $ | 1,436 |   | $ | 1,200 |   |
| General and  administrative |       | $                                     | 604        |                                 | $          | 504 |   | $ | 1,828 |   | $ | 2,321 |   |

 

**Recent Accounting Pronouncements**

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.

In July 2006, FASB issuedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”). FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement 

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of a tax position taken,or expected to be taken, in a tax return. FIN 48 requires the affirmativeevaluation that is more-likely-than-not, based on the technical merits of a taxposition, that an enterprise is entitled to economic benefits resulting frompositions taken in income tax returns. If a tax position does not meet themore-likely-than-not recognition threshold, the benefit of that position is notrecognized in the financial statements. FIN 48 also requires companies todisclose additional quantitative and qualitative information in their financialstatements about uncertain tax positions. We adopted FIN 48 on January 1, 2007,which did not have a material impact on our consolidated financial statements.

## **Resultsof Operations**

***Revenues***

Revenues increased to $2,586,000 in the three monthsended September 30, 2007 from $1,114,000 in the three months ended September30, 2006, but decreased to $4,876,000 in the nine months ended September 30,2007 from $6,244,000 in the nine months ended September 30, 2006. This increasein revenues for the three months ended September 30, 2007 was primarily due toan increase in sales of our Cable Solutions products to $1,026,000 compared torevenue of $161,000 from our Cable Solutions products for the three monthsended September 30, 2006. Revenues from our Wireless Solutions products increased$607,000 for the three months ended September 30, 2007 compared to the threemonths ended September 30, 2006.

The decrease in revenues for the nine months endedSeptember 30, 2007 was primarily the result of a reduction in the first quarterof 2007 of our Wireless Solutions products sold to ANI (a related party asdiscussed in note 3). Revenue for the three and nine months ended September 30,2007 and 2006 did not include inventory previously written down to $0.

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

***Costof Revenues***

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

Cost of revenues increased to $2,605,000 during thethree months ended September 30, 2007 from $1,097,000 during the three monthsended September 30, 2006, and was $4,771,000 and $4,840,000 in the nine monthsended September 30, 2007 and 2006, respectively. The increase in cost of revenuesfor the three months ended September 30, 2007 was primarily attributable toincreases in shipments of our products. For the three months and nine monthsended September 30, 2007, we recorded a write-down of inventory of $47,000 and$183,000, respectively, compared to a write-down of inventory of $169,000 and$169,000 in the three and nine months ended September 30, 2006, respectively.Our gross margins during the three and nine months ended September 30, 2007decreased primarily due to the decrease in shipments of our products togetherwith flat fixed costs. We anticipate that our gross margins will continue tofluctuate based on our product and customer mix, revenue level and inventoryvaluations.

***Researchand Development***

Our research and development expenses were $3,260,000and $2,933,000 during the three months ended September 30, 2007 and 2006,respectively, and $8,891,000 and $8,344,000 during the nine months endedSeptember 30, 2007 and 2006, respectively. Of these expenses, the CableSolutions segment accounted for approximately $2,285,000 and $1,715,000 duringthe three months ended September 30, 2007 and 2006, respectively, and $6,586,000and $4,454,000 during the nine months ended September 30, 2007 and 2006,respectively. The Wireless Solutions segment accounted for the remainingexpenses of approximately $975,000 and $1,218,000 during the three months endedSeptember 30, 2007 and 2006, respectively, and $2,305,000 and $3,890,000 duringthe nine months ended September 30, 2007 and 2006, respectively. Theseexpenses consisted primarily of personnel, facilities, equipment and suppliesand were charged to operations as incurred. All of our research and developmentactivities are conducted in our Israeli facility.

The increase in our research and development expensesin our Cable Solutions segment during the three months ended September 30, 2007compared to the same period in 2006 mainly resulted from increases in (a)salaries, compensation, recruiting fees and severance resulting from our costreduction program

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from $737,000 to $1,136,000, (b) travel expenses of$39,000, and (c) subcontractors, materials and other professional fees from $476,000to $497,000 during the three months ended September 30, 2006 and 2007,respectively.

The increase in our research and development expensesin our Cable Solutions segment during the nine months ended September 30, 2007compared to the same period in 2006 mainly resulted from increases in (a)salaries, compensation, recruiting fees and severance resulting from our costreduction program from $2,106,000 to $3,589,000, (b) subcontractors, materialsand other professional fees from $1,001,000 to $1,189,000, and (c) overhead expensesfrom $530,000 to $773,000 during the nine months ended September 30, 2006 and2007, respectively.

The decrease in our research and development expensesin our Wireless Solutions segment during the three months ended September 30,2007 compared to the same period in 2006 resulted from a decrease in (a)subcontractors, materials and other professional fees from $163,000 to $40,000,(b) travel expenses of $39,000, and (c) non-cash expenses related to stockoption grants from $91,000 to $29,000 during the three months endedSeptember 30, 2006 and 2007, respectively.

The decrease in our research and development expensesin our Wireless Solutions segment during the nine months ended September 30,2007 compared to the same period in 2006 resulted from decreases in (a)salaries, compensation and recruiting fees from $1,957,000 to $1,337,000 due todecreased workforce (b) subcontractors, materials and other professional feesfrom $770,000 to $274,000, (c) non-cash expenses related to stock option grantsfrom $294,000 to $69,000 and (d) overhead expenses from $180,000 to $64,000during the nine months ended September 30, 2006 and 2007, respectively.

***Salesand Marketing***

Sales and marketing expenses increased to $2,370,000 from$2,080,000 and decreased to $6,956,000 from $7,294,000 during the three and ninemonths ended September 30, 2007 and 2006, respectively. Sales and marketingexpenses consist of salaries and related costs for sales and marketingemployees, consulting fees and expenses for travel, trade shows, marketresearch, branding and promotional activities.

Sales and marketing expenses for our Cable Solutionssegment were approximately $2,251,000 and $6,592,000 during the three and ninemonths ended September 30, 2007, respectively, compared to $1,679,000 and$5,026,000 for the three and nine months ended September 30, 2006,respectively.

The increase during the three months and nine monthsended September 30, 2007 compared to the same periods in 2006 resulted mainlyfrom increases in (a) recruiting fees of $113,000 and $223,000, due toincreased workforce, (b) $157,000 and $342,000 of non-cash expenses related tostock option grants, and (c) $324,000 and $402,000 of overhead expenses,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.

Sales and marketing expenses for our WirelessSolutions segment were approximately $119,000 and $364,000 during the three andthe nine months ended September 30, 2007, respectively. For the three and thenine months ended September 30, 2006, the sales and marketing expenses for ourWireless Solutions segment were $401,000 and $2,268,000, respectively. The decreasein the expenses for our Wireless Solutions segment in the three and nine monthsended September 30, 2007 compared to the same periods in 2006 resulted from adecrease in the sales and marketing workforce of our Wireless Solutions segmentfollowing the equipment agreement signed with ANI and our focus on our CableSolutions segment. During the three months ended September 30, 2006, werelocated our wireless sales and marketing department from Palo Alto,California to Norcross, Georgia, and decreased our workforce. Given thisreduction in workforce, we anticipate that our sales and marketing expenses ofour Wireless Solutions segment will continue to decrease in future periods.

***Generaland Administrative***

General and administrative expenses were $2,375,000and $1,962,000 during the three months ended September 30, 2007 and 2006,respectively. Of these expenses, approximately $1,643,000 and $443,000 werefrom our Cable Solutions segment and approximately $732,000 and $1,519,000 werefrom our Wireless Solutions segment during the three months ended September 30,2007 and 2006, respectively.

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For the nine months ended September 30, 2007 and 2006,general and administrative expenses were $6,696,000 compared to $6,906,000,respectively. Of these expenses, approximately $4,656,000 and $1,015,000 werefrom our Cable Solutions segment and approximately $2,040,000 and $5,891,000were from our Wireless Solutions segment during the nine months ended September30, 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 September 30, 2007 compared to the same period in2006 was primarily due to increases in (a) non-cash expenses related tostock option grants of $570,000 compared to $504,000, (b) overhead expenses of$158,000, and (c) professional fees and subcontracting services of $286,000compared to $137,000, mostly related to our implementation of internal controlsover financial reporting required by the Sarbanes-Oxley Act of 2002.

The decrease in general and administrative expensesduring the nine months ended September 30, 2007 compared to the same period in2006 was primarily due to the reduction in overhead expenses after our movefrom Palo Alto, California to Norcross, Georgia.

We expect general and administrative expenses to behigher in the future as we continue to implement internal controls over financialreporting as required by the Sarbanes-Oxley Act of 2002 and to execute ourstrategic plans and business development efforts.

***Financial Income and Expense***

“Financial Income” and “Financial Expense” includesinterest and investment income, foreign currency remeasurement gains andlosses. Net interest expense was $623,000 and $4,922,000 for the three and ninemonths ended September 30, 2007, respectively, compared to net interest expenseof $489,000 and $1,103,000 for the three and nine months ended September 30,2006, respectively. As a result of the extinguishment of the 2006 ConvertibleNote and Senior Secured Note, we recorded $3,263,000 in the nine months endedSeptember 30, 2007 as financial expenses consisting of $2,231,000 ofunamortized accretion and $1,032,000 of unamortized issuance expenses. Inaddition we had increased interest expenses due to our amended SyntekPromissory Note, 2006 Convertible Note and Senior Secured Note. These increaseswere partially offset by interest income derived mainly from our cash andshort-term investment balances.

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 $1,033,000 during the nine monthsended September 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 subsidiaries’ proportionate share ofincome.

Since our Israeli subsidiaries have not achievedtaxable income, the tax benefits periods have not yet commenced. Thesubsidiaries’ losses are expected to offset certain future earnings of thesubsidiaries during the tax-exempt period; therefore, the utilization of thenet operating losses will generate no tax benefits. Accordingly, deferred taxassets from such losses have not been included in our 2006 annual consolidatedfinancial statements. The entitlement to the above benefits is 

 

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conditioned upon the subsidiaries fulfilling theconditions stipulated by the law, regulations published thereunder and theinstruments of approval for the specific investments 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 nine months ended September 30, 2007,we incurred a net loss of $24,439,000 and had an accumulated deficit of$289,015,000. This raises substantial doubt about our ability to continue as agoing concern. Our ability to continue as a going concern will depend upon ourability to raise additional capital during the next six to 12 months or attainprofitable operations. We are pursuing raising additional capital to fund ouroperations although there is no assurance that such capital will be availableto us. In addition, we are seeking to expand our revenue base by adding newcustomers and to further reduce expenses. 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. The accompanyingcondensed consolidated financial statements do not include any adjustments toreflect the possible future effects on the recoverability and classification ofassets or the amounts and classification of liabilities that may result from ourpossible inability to continue as a going concern.

As of September 30, 2007, we had $19,221,000 of cash,cash equivalents and short-term investments.

During the nine months ended September 30, 2007, netcash used in operations was $18,062,000, comprised mainly of our loss of$24,439,000, partially offset by (a) non-cash charges related to depreciationand amortization of $634,000, (b) stock-based compensation of $3,763,000, (c)financing expenses of $4,440,000 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, and (d) an increase of liability for employee rights upon retirementof $665,000. Changes in working capital accounts was a use of $3,125,000 ofcash.

During the ninemonths ended September 30, 2006, net cash used in operations was $11,957,000,comprised mainly of our loss of $22,893,000 partially offset by (a) non-cashcharges related to depreciation and amortization of $645,000 and stock-basedcompensation of $4,248,000, (b) a $514,000 increase in liability for employeerights upon retirement, (c) $1,043,000 of accretion and amortization offinancing instruments, net and (d) changes in other working capital accounts of$4,486,000.

During the nine months ended September 30, 2007, netcash provided by investing activities was $4,903,000 comprised of sales andmaturities of short-term investments, net of $5,730,000 in purchases ofshort-term investments and $682,000 in purchases of property and equipment.During the nine months ended September 30, 2006, net cash used in investingactivities was $6,515,000, comprised of the purchase of $6,198,000 ofshort-term investments, net of sales and maturities of our short-terminvestments.

Financing activities inthe nine months ended September 30, 2007 were approximately $19,404,000 relatedto the 2007 Financing which included the 2007 Convertible Note and proceeds wereceived upon the exercise of stock options. Financing activities in the ninemonths ended September 30, 2006 were approximately $26,003,000 and related to(a) the 2006 Financing, which included the issuance of our common stock, the2006 Convertible Note, the Senior Secured Note and warrants to purchase ourcommon stock, net of issuance cost and (b) proceeds we received upon theexercise of stock options. See note 7 above for additional information aboutthe 2007 Financing and the 2006 Financing.

We have purchase obligations to our suppliers that supportour operations in the normal cause of our business. The obligations require usto purchase minimum quantities of the suppliers’ products at a specified price.As of September 30, 2007 and December 31, 2006, we had approximately $5,171,000and $1,136,000, respectively, of purchase obligations. These obligations areexpected to become payable at various times through 2007 and the first quarterof 2008.

 

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**Employment Agreements**

                ***WalterUngerer***.  On November 8,2007, Walter Ungerer, our Vice President of Corporate Communications andInvestor Relations, was promoted to Executive Vice President, CorporateStrategy and Investor Relations pursuant to the terms of an employmentagreement (the “**Ungerer Agreement**”), effective asof September 1, 2007 (the “**Effective Date**”).

 

                The Ungerer Agreement is for atwo-year term, with automatic one-year renewals, subject to termination uponprior notice by either party.  Mr.Ungerer will receive an annual base salary of $210,000, which will be reviewedon or before December 31, 2008 and thereafter based on Mr. Ungerer’s servicesand our financial results.  Mr. Ungereris eligible to receive employee benefits available to all employees and maybecome eligible to receive an annual cash bonus based on performance objectivesto be agreed to by Mr. Ungerer and our Chief Executive Officer.  Mr. Ungerer also was granted a stock optionto purchase 30,000 shares of our common stock which will vest in equal monthlyinstallments for the next 48 months.  Theexercise price of the stock options is $5.99.

 

                If the Ungerer Agreement isterminated without “Cause” (as defined therein) before the initial two-yearterm, we must pay Mr. Ungerer severance equal to six months of his annualsalary (without bonus), payable over such period in accordance with our usualpayroll practices.

 

                If Mr. Ungerer’s employment isterminated upon a “Change of Control” (as defined in the Ungerer Agreement),Mr. Ungerer shall be entitled to (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 upon a Change of Control, Mr. Ungerer isoffered employment by our successor with responsibilities substantially similarto those in the Ungerer Agreement and he does not accept the offer, 33.3% ofhis stock options will immediately vest. If upon a Change of Control, Mr. Ungerer accepts employment by oursuccessor with responsibilities substantially similar to those in the UngererAgreement, 33.3% of his stock options will immediately vest.  If Mr. Ungerer terminates his employment forGood Reason (as defined in the Ungerer Agreement) with our successor on orafter the six-month anniversary of the Effective Date of the Ungerer Agreement,all remaining stock options held by Mr. Ungerer will immediately vest.

 

                Mr. Ungerer,age 39, served as our Vice President, Corporate Communications andInvestor Relations from November 2004 until his recent promotion.Mr. Ungerer has over 10 years of experience managing finance,investor relations and communications within organizations that have earnedrecognition from Reuters, Frost and Sullivan and an Emmy Award from theNational Academy of Television Arts and Sciences. Prior to joining us,Mr. Ungerer was director of investor relations at Concurrent ComputerCorporation from 2001 until October 2004. Previously, Mr. Ungererheld various positions with Scientific-Atlanta, a Cisco company, which hejoined in 1996 as assistant manager of structured trade finance, and he waspromoted to manager of corporate treasury services and manager of investorrelations before leaving the company in 2001. Previously, Mr. Ungererspent four years in various finance related positions at Fortune100 companies Eaton Corporation and Cooper Industries.

 

                ***TashiaL. Rivard***.  On November 8,2007, we entered into an employment agreement with Tashia L. Rivard, ourcurrent General Counsel and Corporate Secretary (the “**RivardAgreement**”), effective as of September 1, 2007.

 

                The Rivard Agreement is for atwo-year term, with automatic one-year renewals, subject to termination uponprior notice by either party.  Ms. Rivardwill receive an annual base salary of $220,000, which will be reviewed on orbefore December 31, 2008 and thereafter based on Ms. Rivard’s services and ourfinancial results.  Ms. Rivard iseligible to receive employee benefits available to all employees and may becomeeligible to receive an annual cash bonus based on performance objectives to beagreed to by Ms. Rivard and our Chief Executive Officer.

 

                If the Rivard Agreement isterminated without “Cause” (as defined therein) before the initial two-yearterm, we must pay Ms. Rivard severance equal to six months of her annual salary(without bonus), payable over such period in accordance with our usual payrollpractices.

 

                If Ms. Rivard’s employment isterminated upon a “Change of Control” (as defined in the Rivard Agreement), Ms.Rivard shall be entitled to (a) in lieu of the severance described in theforegoing paragraph, severance equal to her 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 upon a Change of Control, Ms. Rivard isoffered employment by our successor with responsibilities substantially similarto those in the Rivard Agreement and she does not accept the offer, 33.3% ofher stock options will immediately vest. If upon a Change of Control, Ms. Rivard accepts employment by oursuccessor with responsibilities substantially similar to those in the RivardAgreement, 33.3% of her stock options will immediately vest.  If Ms. Rivard terminates her employment forGood Reason (as defined in the Rivard Agreement) with our successor on or afterthe six-month anniversary of the Effective Date of the Rivard Agreement, allremaining stock options held by Ms. Rivard will immediately vest.

 

                Ms. Rivard,age 38, has served as our General Counsel and Corporate Secretary sinceJune 2006, and as our Deputy General Counsel from July 2005 until herappointment as General Counsel. Prior to joining us, Ms. Rivard was anattorney at Adaptec, Inc., a provider of storage solutions for data,practicing securities and general corporate law from January 2005 toJuly 2005. Prior to that time, Ms. Rivard practiced securities,mergers and acquisitions and general corporate law at Montgomery &Hansen LLP (formerly Montgomery Law Group, LLP) from November 2003to December 2004; Brobeck, Phleger & Harrison, LLP in PaloAlto, California from May 2000 to December 2001; WarnerNorcross & Judd LLP in Grand Rapids, Michigan from 1995 toApril 2000 and from April 2002 to November 2003.

 

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**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:

•                  ourbelief that our ability to continue as a going concern will depend upon ourability to raise additional capital during the next six to 12 months or attain profitable operations;

•                  ourbelief that failure to secure additional capital or to expand our revenue basewould result in depleting our available funds and not being able to pay ourobligations when they become due;

•                  our belief that our most critical accounting policiesinclude policies related to revenue recognition, inventory, extinguishment ofdebt, fair value of financial instruments, debt issuance costs and stock-basedcompensation;

•                  ourexpectation that EITF 00-19-2 will not have a material impact on ourconsolidated financial statements;

•                  ouranticipation that our revenues will remain concentrated among a few customersfor the foreseeable future;

•                  ouranticipation that our gross margins will continue to fluctuate based on ourproduct and customer mix, revenue level and inventory valuations;

•                  ouranticipation that our Cable Solutions segment sales and marketing workforcewill increase in future periods as we increase our efforts to penetrate theCable Solutions market and meet our customer demands;

•                  ouranticipation that sales and marketing expenses of our Wireless Solutionssegment will continue to decrease in future periods given the reduction in ourexpenses related to the relocation of our sales and marketing supportfacilities from California to Georgia and our general de-emphasis of ourWireless Solutions segment;

•                  ourexpectation that general and administrative expenses will be higher in thefuture as we continue to implement internal controls over financial reportingas required by the Sarbanes-Oxley Act of 2002 and to execute our strategicplans and business development efforts;

•                  our expectationthat the losses of our Israeli subsidiaries will offset certain future earningsof the subsidiaries, if attained, during the tax-exempt period (provided underIsraeli law); and

•                  ourbelief as to the payment of purchase obligations that are expected to becomepayable at various times through 2007 and the first quarter of 2008.

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.****           ****Quantitative and QualitativeDisclosures 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***

*** ***

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*** ***

***have not engaged in hedging transactions to reduce ourexposure to fluctuations that may arise from changes in foreign exchange rates.In the event of an increase in inflation rates in Israel, or if appreciation ofthe New Israeli Shekels occurs without a corresponding adjustment in ourdollar-denominated revenues, our results of operation and business could bematerially harmed.***

***As of September 30, 2007, we had cash, cash equivalents andshort-term investments of $19,221,000. 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.***

The fair value of ouravailable-for-sale securities and cash equivalents is also sensitive to changesin the general level of interest rates in the United States, and the fair valueof our portfolio will fall if market interest rates increase. However, since wegenerally have the ability to hold these investments to maturity, thesedeclines in fair value may never be realized. If market interest rates were toincrease by 10% from levels at September 30, 2007, the fair value of ourportfolio would decline by an immaterial amount.

The potential changenoted above is based on sensitivity analyses performed on our financialposition as of September 30, 2007. Actual results may differ as ouranalysis of the effects of changes in interest rates does not account for,among other things, sales of securities prior to maturity and repurchase ofreplacement securities, the change in mix or quality of the investments in theportfolio and changes in the relationship between short-term and long-terminterest rates.

**Item 4.****   ****Controls and Procedures**

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

                There have not been any changesin our internal control over financial reporting (as such term is defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarterto which this report relates that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

 

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

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

Our business is subjectto 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 $24,439,000 for thenine months ended September 30, 2007 and as of that date our accumulateddeficit was $289,015,000. Our revenues and gross margins may not grow or evencontinue at their current levels and may decline even further. If our revenuesdo not rapidly increase, or if our expenses increase at a greater pace than ourrevenues, we will never become profitable.

**We 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, we delivered the 2007Convertible Note, $17,500,000 of which we used to pay off the outstanding 2006Convertible Note and the Senior Secured Note issued to Goldman,Sachs & Co. in the 2006 Financing. Following this payoff and paymentof issuance expenses, our net proceeds were approximately $17,350,000.Notwithstanding the 2007 Financing, we will 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.  Further, if we do not secure additionalcapital in the next six to 12 months or if we fail to expand our revenue base,we may not be able to continue as a going concern.

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

We recently implemented acost reduction program by reducing our workforce. The full implementation ofthis program resulted in a reduction of our workforce of approximately 16%(when compared to the workforce levels as of June 2007). This reduction willhave the largest effect on our research and development activities. Our abilityto further develop and market our products may be limited if we have notaccurately predicted the appropriate workforce requirements for our researchand development efforts.

These reductions are inaddition to a cost reduction program in 2005. In this regard, we are currentlyexperiencing difficulty in hiring skilled research and development personnel inIsrael for our Cable Solutions segment. If this difficulty continues in theforeseeable future, our research and development efforts would be harmed.

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

The market for broadbandproducts in the cable industry is extremely competitive, subject to drastictechnological changes, changes in capital expenditure budgets and highlyfragmented. Our products in the Cable Solutions segment are new and relativelyunknown; accordingly, we have not generated significant revenue in thissegment. We have only relatively recently shipped our first commercial ordersfor our UltraBand solution to various systems of a top MSO. Other than theseorders, we have only begun to install our UltraBand products with customers infield trials. There can be no assurance that our installations of our cableproducts will be successful. As some of our cable products continue to be in adevelopment stage, we may face challenges such as market resistance to newproducts, 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.

 

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**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 an industrythat is characterized by intense competition, supply shortages or oversupply,rapid technological change, unpredictable sales patterns, declining averageselling prices and rapid product obsolescence, all of which make it morechallenging 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 is statedat the lower of cost or market value. Determining market value of our inventoryrequires numerous judgments, including, but not limited to, judgments regardingaverage selling prices and sales volumes for future periods. We primarilyutilize estimated selling prices for measuring any potential declines in marketvalue below cost. When market value is determined to be below cost, we make appropriateallowances to reduce the value of inventories to net realized value. We mayreduce the value of our inventory when we determine that inventory is slowmoving, obsolete or excessive or if the selling price of the product isinsufficient to cover product costs and selling expenses.

In this regard, ourinventory increased substantially in 2005 because sales were substantially lessthan 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 nine months ended September 30, 2007, we recorded a write downof inventory of $47,000 and $183,000, respectively.

If our sales do notincrease, the sales price of our products decrease or we are otherwise unableto control inventory levels consistent with actual demand, we may be requiredto write down additional inventory. Any such write-down would adversely affectour operating results in future periods.

**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 2007 ConvertibleNote in the principal amount of $35,000,000. The 2007 Convertible Note containsevents of default that, if triggered, would require us to pay the principal andaccrued interest under such note immediately (after the expiration ofapplicable cure periods). If an event of default occurs under the 2007Convertible Note and the holder declares all outstanding principal and interestimmediately due and payable, our cash position and business prospects would besubstantially harmed.

**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, regulatoryrequirements and the success of initial roll-outs.

For our cable products tobe sold in significant quantities, MSOs also must be willing and able tosubstantially increase the available bandwidth on their networks. MSOs may notbe willing or able to develop additional services and revenue streams tojustify the deployment of our technology. If the future demand for bandwidth isinsubstantial, is addressed by alternative technologies or does not develop inthe near future, our prospects would be adversely affected.

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

We have not yet producedour UltraBand solutions in high volumes and there may be challenges andunexpected delays, such as quality control issues, in our attempts to increasevolume and lower production costs. Our long-term success depends on our abilityto produce high quality products at a low cost and, in particular, to reducethe production cost of our cable products designed for residential use.

 

 

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Because we have not yetdeployed 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.

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

Future demand for ourbroadband products will depend significantly on the growing market acceptanceof 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 of theseservices will depend in part on a variety of new network architectures, such asfiber-to-the premises networks, video compression standards such as MPEG-4 andMicrosoft’s Windows Media 9, the greater use of protocols such as IP and theintroduction of new consumer devices, such as advanced set-top boxes anddigital 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 toprovide a combination of video, voice and data services to consumers, alsoknown as the “triple play;”

•                                          the use of digital video by businessesand governments;

•                                          the privatization of state ownedtelecommunication companies in other countries;

•                                          efforts by regulators and governments in the UnitedStates and abroad to encourage the adoption of broadband and digitaltechnologies; and

•                                          the extent and nature of regulatory attitudes towardsuch issues as competition between operators, access by third parties tonetworks of other operators and new 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 UltraBand solutionsare in the early stages of commercialization. We currently have limitedrelationships with potential customers and distributors as well as limitedsales staff. We will be successful only if we are able to develop distributionchannels to market and sell our cable products in sufficient volumes.

To develop such channelsand market and sell our cable products, we need to grow our sales and marketingteam. It may be difficult for us to hire and retain additional qualifiedpersonnel. Integrating new personnel, particularly United States-basedpersonnel, may be challenging from a culture and logistics perspective becausemost of our employees currently are based in Israel.

We currently have limitedexposure 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’s decision topurchase our products typically involves a significant technical evaluation,formal internal procedures associated with capital expenditure approvals andtesting and acceptance of new systems that affect key operations. For these andother reasons, the sales cycle associated with our systems can be lengthy andsubject to a number of significant risks, over which we have little or nocontrol. Because of the growing sales cycle and the likelihood that we may 

 

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rely on a small number ofcustomers for our revenues, our operating results would be seriously harmed ifsuch revenues do not materialize when anticipated, or at all.

**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 functional currencyis the United States dollar. We generate substantially all of our revenues inUnited States. dollars, but we incur a substantial portion of our expenses,principally salaries and related personnel expenses related to research anddevelopment, in New Israeli Shekels. As a result, we are exposed to the riskthat the rate of inflation in Israel will exceed the rate of devaluation of theNIS in relation to the dollar or that the timing of this devaluation lagsbehind inflation in Israel.

**If telecommunicationsservice providers and systems integrators do not promote and purchase ourproducts, or if the telecommunications equipment market does not grow, ourbusiness 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 conditions remaindifficult and capital spending plans are often constrained. It is likely thatfurther industry restructuring and consolidation will take place. Companiesthat have historically not had a large presence in the broadband accessequipment 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 the telecommunicationsmarket, and in particular the market for broadband access equipment, does notimprove and grow, our business would be substantially harmed.

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

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

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

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

In addition, thederegulation, privatization and economic globalization of the worldwidecommunications market, which resulted in increased competition and escalatingdemand for new technologies and services, may not continue in a 

 

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manner favorable to us orour business strategies. In addition, the growth in demand for Internetservices and the resulting need for high-speed or enhanced communicationsproducts may not continue at its current rate or at all.

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

A relatively small numberof customers account for a large percentage of our revenues, as set forth inthe table below:
| ** **                 | ** ** | **Three Months  Ended September 30** | ** ** | **Nine Months  Ended September 30** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A,  related party |       | 60                                                  | %          | 85                                                 | %          | 62 | % | 86 | % |
| Customer B                 |       | 38                                                  | %          | 14                                                 | %          | 36 | % | 11 | % |

 

We expect that we willcontinue to depend on a limited number of customers for a substantial portionof our revenues in future periods. The loss of a major customer could seriouslyharm our ability to sustain revenue levels, which would seriously harm ouroperating results.

In this regard, sales toCustomer A in the year ended December 31, 2006 accounted for the vastmajority of our sales during that year. This customer was formed in 2006 andhas 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.

We have designed productsfor our Wireless Solutions segment to meet the specifications of Customer Abased on that customer’s assessment of the utility sector. Sales in ourWireless Solutions segment could be adversely affected if Customer A has notaccurately assessed the needs of the utility sector.

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

We have increased certainexpenses to address new business opportunities in the Cable Solutions segment,and we will need to continue to monitor closely our costs and expenses. If themarket for our cable solutions does not expand or takes longer to develop thanwe expect, we may need to further reduce our operations.

**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 success depends inpart on our ability to protect our proprietary technologies. We rely on acombination 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, our pending orfuture trademark applications may not be approved and may not be sufficient toprotect our trademarks in the markets where we either do business or hope toconduct business. The inability to secure any necessary trademark rights couldbe costly and could seriously harm our business.

We regularly evaluate andseek to explore and develop derivative products relating to our Cable Solutionssegment. We may not be able to secure all desired intellectual propertyprotection relating to such derivative products. Furthermore, because of therapid pace of change in the broadband industry, much of our business and manyof our products rely on 

 

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technologies that evolveconstantly and this continuing uncertainty makes it difficult to forecastfuture demand for our products.

**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, the anticipatedbenefits of any acquisition may not be realized or may not be realized in thetime period we expect. Future acquisitions could result in dilutive issuancesof equity securities, the incurrence of debt, contingent liabilities oramortization expenses related to goodwill and other identifiable intangibleassets and the incurrence of large and immediate write-offs, any of which couldseriously harm our business. In addition, we could spend significant resourcesin searching for and investigating new business opportunities, and ultimatelymay 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 our productswill depend on the size and timing of capital expenditures bytelecommunications service providers and MSOs. These capital spending patternsare dependent upon factors including:

•              the availability of cash or financing;

•              budgetary issues;

•              regulation and/or deregulation of thetelecommunications industry;

•              competitive pressures;

•              alternative technologies;

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

•              industry standards;

•              the pattern of increasing consolidation in theindustry; and

•              general consumer spending and overall economicconditions.

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 not participate inthe standards process of the Cable Television Laboratories, Inc., a cableindustry consortium that establishes cable technology standards and administerscompliance testing. In the future, we may determine to join or not join otherstandards or similar organizations. Our membership in these organizations coulddilute our proprietary intellectual property rights in our products while ourfailure to participate in others could jeopardize acceptance of any of ourproducts that do not meet industry standards.

 

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

Product standardizationinitiatives encouraged by MSOs and telecommunications companies may adverselyaffect revenues, gross margins and profits. In the past, standardizationefforts by major MSOs have negatively impacted equipment vendors by leading toequipment obsolescence, commoditization and reduced margins. If our products donot comply with future standards, our prospects could be adversely affected.

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

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

•                                          the uncertain timing and level of market acceptancefor our systems and the uncertain timing and extent of rollouts of broadbandaccess equipment and systems by the major service providers;

•                                          the fact that we often recognize a substantialproportion of our revenues in the last few weeks of each quarter;

•                                          the ability of our existing and potential directcustomers to obtain financing for the deployment of broadband access equipmentand systems;

•                                          the mix of products sold by us and themix of sales channels through which they are sold;

•                                          reductions in pricing by us or ourcompetitors;

•                                          global economic conditions;

•                                          the effectiveness of our system integrator customersin marketing and selling their network systems equipment;

•                                          changes in the prices or delays indeliveries of the components we purchase or license; and

•                                          any acquisitions or dispositions we mayeffect.

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

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

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;

•              terrorist acts, international conflicts and acts ofwar;

•              our international customers’ ability to obtainfinancing to fund their deployments;

•              changes in regulatory requirements and licensingfrequencies to service providers;

 

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•              import or export licensing requirements and tariffs;

•              labor shortages or stoppages;

•              trade restrictions and tax policies; and

•              limited protection of intellectual property rights.

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

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

We generally sell ourbroadband access equipment and systems based on individual purchase orders. Ourcustomers generally are not obligated by agreements to purchase our systems,and the agreements we have entered into, other than our agreement with ANI, donot 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.**

Countries worldwide areconsidering or are in the process of allocating frequencies for wirelessapplications, but not all markets have done so. If the United States and/orother countries do not provide sufficient spectrum for wireless applications orreallocate spectrum in the wireless frequency bands for other purposes, ourcustomers may delay or cancel deployments in broadband wireless, which couldseriously harm our business. Further, if our customers are unable to obtainlicenses or sufficient spectrum in the wireless frequency bands our businesscould be seriously harmed.

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

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

The market for broadbandaccess equipment and systems is intensely competitive, rapidly evolving andsubject to rapid technological change. The main competitive factors in ourmarkets include:

•              product performance, features and reliability;

•              price;

•              stability;

•              scope of product line;

•              sales and distribution capabilities;

•              technical service and support;

•              relationships, particularly those with systemintegrators and operators; and

•              industry standards.

 

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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 and cable.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 systems occasionallycontain certain defects or errors. This may result either from defects incomponents supplied by third parties or from errors or defects in our firmwareor hardware that we have not detected. We have in the past experienced, and mayexperience from time-to-time, defects in new or enhanced products and systemsafter shipments, or defects in deployed systems. This could occur in connectionwith stability or other performance problems. Our customers integrate oursystems into their networks with components from other vendors. Accordingly,when problems occur in a network system, it may be difficult to identify thecomponent that caused the problem. Regardless of the source of these defects orerrors, we will need to divert the attention of our engineering personnel fromour product development efforts to address the defect or error. We haveincurred in the past and may again incur significant warranty and repair costsrelated to defects or errors, and we also may be subject to liability claimsfor damages related to these defects or errors. The occurrence of defects orerrors, whether caused by our systems or the components of another vendor, mayresult in significant customer relationship problems and injury to ourreputation and may impair the market acceptance of our 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 continuemanufacturing our systems in required volumes, we would have to identifyqualified alternative manufacturers, which would result in delays causing ourresults of operations to suffer. Our relatively limited experience with thesemanufacturers and lack of visibility as to the manufacturing capabilities ofthese companies if our volume requirements significantly increase does notprovide us with a reliable basis on which to project their ability to meetdelivery schedules, yield targets or costs. If we are required to findalternative manufacturing sources, we may not be able to satisfy our productionrequirements at acceptable prices and on a timely basis, if at all. Anysignificant interruption in supply would affect the allocation of systems tocustomers, which in turn could seriously harm our business. In addition, we currentlyhave no formal written agreement with a manufacturer for our modem products.Our current inventory of modems is unlikely to fulfill anticipated demand, andwe will therefore be required to find a manufacturer in the near future. Ourinability to enter into an agreement with a manufacturer for our modems wouldharm our business.

In addition to sales tosystem 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 3GHz 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 thedelivery schedules required by our customers, and at acceptable prices, ourbusiness would be substantially harmed.

Our UltraBand solutionsare implemented over the HFC plant and, as such, they interface and integratewith existing products from multiple other vendors. Future offerings by thesevendors may not be sufficiently compatible with our 

 

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UltraBand solutions. Inaddition, we depend on the continuous delivery of components by variousmanufacturers of electronic connectors, filters, boards and transistors.

Furthermore, we haveproduced 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 or delayor shortages in the supply of components could cause production delays and asubstantial loss of revenue.**

We currently obtain keycomponents from a limited number of suppliers. Some of these components areobtained from a single source supplier. We generally do not have long-termsupply contracts with our suppliers. Further, we have experienced delays and shortages on more than oneoccasion. These factors present us with the following risks:

•                                    delays in delivery or shortages incomponents could interrupt and delay manufacturing and result in cancellationof orders for our systems;

•                                    suppliers could increase component pricessignificantly and with immediate effect;

•                                    we may not be able to develop alternativesources for system components, if or as required in the future;

•                                    suppliers could discontinue themanufacture or supply of components used in our systems. In such event, wemight need to modify our systems, which may cause delays in shipments,increased manufacturing costs and increased systems prices; and

•                                    we may hold more inventory than isimmediately required to compensate for potential component shortages ordiscontinuation.

The occurrence of any ofthese or similar events would harm our business.  Our inability to obtain adequatemanufacturing capacity at acceptable prices, or any delay or interruption insupply, could reduce our revenues or increase our cost of revenue and couldseriously harm our business.

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

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

One of our directors anda majority of our employees are based in Israel, and many of them are currentlyobligated to perform annual reserve duty and are subject to being called toactive duty at any time under emergency circumstances. We cannot assess thefull impact of these requirements on our workforce or business if conditionsshould change, and we cannot predict the effect on us of any expansion orreduction of these obligations.

 

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

Third parties couldassert, and it could be found, that our technologies infringe their proprietaryrights. We could incur substantial costs to defend any litigation, andintellectual property litigation could force us to do one or more of thefollowing:

•              obtain licenses to the infringing technology;

•              pay substantial damages under applicable law;

•              cease the manufacture, use and sale of infringingproducts; or

•              expend significant resources to develop non-infringingtechnology.

Any infringement claim orlitigation against us could significantly harm our business, operating resultsand financial condition.

**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 or evolutionof regulations and industry standards for broadband products, through officialstandards committees or widespread use by operators, could require us to modifyour 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 our products andtechnology are subject to export control laws and regulations. We are subjectto the risk that more stringent export control requirements could be imposed inthe future on product classes that include products exported by us, which wouldresult in additional compliance burdens and could impair the enforceability ofour contract rights. We may not be able to renew our export licenses asnecessary from time to time. In addition, we may be required to apply foradditional licenses to cover modifications and enhancements to our products.Any revocation or expiration of any requisite license, the failure to obtain alicense for product modifications and enhancements, or more stringent exportcontrol requirements could seriously harm our business.

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

The Sarbanes Oxley Act of2002 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 public company, oursystems of internal controls over financial reporting are required to complywith the standards adopted by the Securities and Exchange Commission (“SEC”)and the Public Company Accounting Oversight Board (the “PCAOB”). We will berequired to make our first annual certification on our internal controls overfinancial 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 PCAOB requirements,and we may be required to design enhanced processes and controls to addressissues identified through this review. This could result in significant delaysand cost to us and require us to divert substantial resources, includingmanagement time, from other activities. We have commenced a review of ourexisting internal control structure and may need to hire additional personnel.Although our review is not complete, we are taking steps to improve ourinternal 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 

 

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material weaknesses inour internal control over financial reporting. We may in the future havematerial weaknesses or other control deficiencies in our internal control overfinancial reporting as a result of our controls becoming inadequate due tochanges in conditions, the degree of compliance with our internal controlpolicies and procedures deteriorating, or for other reasons. If we havesignificant deficiencies or material weaknesses or other control deficienciesin our internal control over financial reporting, our ability to record,process, summarize and report financial information within the time periodsspecified in the rules and forms of the SEC will be adversely affected. Thisfailure could materially and adversely impact our business, our financialcondition 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 ofdirectors, particularly to serve on our audit committee, and qualifiedexecutive officers. We cannot estimate the timing or magnitude of additionalcosts we may incur as a result.

**Oursuccess depends significantly on Davidi Gilo, our Chairman of the Board ofDirectors, and Wayne H. Davis, our Chief Executive Officer, the loss of eitherof whom could seriously harm our business.**

Our future successdepends in large part on the continued services of our senior management andkey personnel. In particular, we significantly depend on the services of DavidiGilo, our Chairman of the board 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 our inception, wehave used stock options as a fundamental component of our employee compensationpackages. We believe that our stock option plans are an important tool to linkthe long-term interests of stockholders and employees, especially executivemanagement, and serve to motivate management to make decisions that will, inthe long run, give the best returns to stockholders. FASB has adopted changesto generally accepted accounting principals in the United States that requireus to record a charge to earnings for employee stock option grants, as well asother equity based awards. The change has negatively impacted our earnings and,if such impact is material in the future, could affect our ability to raisecapital on acceptable terms. In addition, regulations implemented by the NasdaqStock Market requiring stockholder approval for all stock option plans couldmake it more difficult for us to grant stock options to employees in thefuture. To the extent these new regulations make it more difficult orunacceptably expensive to grant stock options to employees, we may incurincreased compensation costs, change our equity compensation strategy or findit difficult to attract, retain and motivate employees, each of which couldmaterially and adversely affect our business.

**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 our capitalinvestments have been granted “approved enterprise” status under Israeli lawproviding us with certain Israeli tax benefits. The benefits available to anapproved enterprise are conditioned upon the fulfillment of conditionsstipulated in applicable law and in the specific certificate of approval. If wefail to comply with these conditions, in whole or in part, we may be requiredto pay additional taxes for the period in which we enjoyed the tax benefits andwould likely be denied these benefits in the future. From time to time, thegovernment of Israel has considered reducing or eliminating the benefitsavailable under the approved enterprise program. These tax benefits may not becontinued in the future at their current levels or at all. The termination orreduction of these benefits would increase our taxes and could seriously harmour business. As of the date hereof, our Israeli subsidiaries have accumulatedloss carry forwards for Israeli tax purposes and therefore have not enjoyed anytax benefits under current approved enterprise programs.

In the past, we havereceived grants from the government of Israel for the financing of a portion ofour research and development expenditures for previous products in Israel. Theregulations under which we received these grants restrict our ability tomanufacture products or transfer technology outside of Israel for productsdeveloped with this technology. Furthermore, these grants may not be availableto us in the future.

 

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As of April 1, 2005,the government of Israel eliminated the ability of companies to submit newapplications for approved enterprise status. This change in the government policymay hinder us in the future with respect to any benefits we may have receivedfor new undertakings which would have been entitled to “approved enterprise”status.

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

The utilization of netoperating loss carryforwards may be subject to substantial annual limitationsif there has been a significant “change in ownership.” Any “change inownership,” as described in Section 382 of the Internal Revenue Code, maysubstantially 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 of ourboard of directors, Lewis Broad, Neill Brownstein, Avraham Fischer, SamuelKaplan and Alan Zimmerman and certain of our officers, have had professionalrelationships with Davidi Gilo, our Chairman of the board 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., of whichMr. Gilo was formerly the controlling stockholder and the Chairman of theboard. In addition, Avraham Fischer is a senior partner of the law firm ofFischer, Behar, Chen & Co., which represents us on matters relating toIsraeli law, is an investor and co-chief executive officer of an Israeliinvestor group in which Mr. Gilo was an investor until October 2005,and is co-chief executive officer and a director of Clal Industries andInvestments, Ltd., which has made a significant investment in ANI, a relatedparty of our company. The long-term relationships between these directors andofficers and Mr. Gilo and his affiliated companies could be considered tolimit their independence.

**Becauseour management has the ability to control stockholder votes, the premium over marketprice that an acquirer might otherwise pay could be reduced and any merger ortakeover could be delayed.**

As of September 30, 2007,our management collectively owned approximately 31.95% 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 ofSeptember 30, 2007).

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

•              electing members to our board of directors;

•              approving significant change-in-control transactions;

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

•              controlling our management and operations.

This concentration ofownership may have the effect of impeding a merger, consolidation, takeover orother business consolidation involving us, or discouraging a potential acquirerfrom making a tender offer for our shares. This concentration of ownershipcould also negatively affect our stock’s market price or decrease any premiumover 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 a continuouspower supply for manufacturing and to conduct our business operations.Interruptions in electrical power supplies occur around the world from time totime. Meanwhile, prices of the resources, such as electrical power and crudeoil, upon which we ultimately rely, directly or indirectly, in running ourbusiness have been volatile. Power shortages could disrupt our manufacturing,information technology and business operations and those of many of our 

 

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suppliers, and couldcause us to fail to meet production schedules and commitments to customers andother third parties. Any disruption to our operations or those of our supplierscould result in damage to our current and prospective business relationshipsand could result in lost revenue and additional expenses, thereby harming ourbusiness 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 success in thewireless 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 continue tooperate our Wireless Solutions segment, our primary focus is now on our CableSolutions segment. Accordingly, we may consider a variety of alternatives toWireless Solutions segment, including the sale, divestiture, license orrestructuring of a substantial portion or all of our current wireless network technologyor assets. If demand for our Wireless Solutions segment increases, we may nothave sufficient products (either in terms of quantity or different productlines) 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 price of ourshares has been and likely will continue to be highly volatile and could besubject to wide fluctuations in response to numerous factors, including thefollowing:

•              actual or anticipated variations in our quarterlyoperating results or those of our competitors;

•              announcements by us or our competitors of new productsor technological innovations;

•              introduction and adoption of new industry standards;

•              changes in financial estimates or recommendations bysecurities analysts;

•              changes in the market valuations of our competitors;

•              announcements by us or our competitors of significantacquisitions or partnerships; and

•              sales of our common stock.

Many of these factors arebeyond our control and may negatively impact the market price of our commonstock, regardless of our performance. In addition, the stock market in general,and the market for technology and telecommunications related companies inparticular, have been highly volatile. Our common stock may not trade at thesame levels compared to shares of other technology companies and shares oftechnology companies, in general, may not sustain their current market prices.

To date, the tradingvolume in our common stock generally has been relatively low and significantprice fluctuations can occur as a result. If the generally low trading volumesexperienced to date continue, such price fluctuations could continue in thefuture and the sale prices of our common stock could decline significantly.Investors may therefore have difficulty selling their shares.

In the past, securitiesclass action litigation has often been brought against a company followingperiods of volatility in the market price of its securities. We could becomethe target of similar litigation in the future. Securities litigation could 

 

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result in substantialcosts and divert management’s attention and resources, which could seriouslyharm 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 market forour common stock will be influenced by the research and reports that industryand securities analysts publish about us or our business. If these analystsfail to publish reports about us or if one or more of these analysts ceasecoverage of our company or fail to publish reports on us regularly, we couldlose visibility in the financial markets, which in turn could cause the priceof our common stock to decline. Moreover, if one or more analysts who cover usdowngrade our common stock or if our operating results do not meet theirexpectations, 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 Amended andRestated Certificate of Incorporation and Amended and Restated Bylaws containanti-takeover provisions that could make it more difficult for a third party toacquire control of us, even if that change in control would be beneficial tostockholders. Specifically:

•                                          our board of directors has the authorityto issue common stock and preferred stock and to determine the price, rights andpreferences of any new series of preferred stock without stockholder approval;

•                                          our board of directors is divided intothree classes, each serving three-year terms;

•                                          super majority voting is required toamend key provisions of our Fifth Amended and Restated Certificate ofIncorporation and Amended and Restated Bylaws;

•                                          there are limitations on who can callspecial meetings of stockholders;

•                                          stockholders are not able to take actionby written consent; and

•                                          advance notice is required fornominations of directors and for stockholder proposals.

In addition, provisionsof Delaware law and our stock option plans may also discourage, delay orprevent 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 our directors arenot residents of the United States, and a substantial portion of our assets andthe assets of these persons are located outside the United States. Therefore,it may be difficult to enforce a judgment obtained in the United States basedupon the civil or criminal liabilities provisions of the United States federalsecurities laws against us or any of those persons or to effect service ofprocess upon these persons in the United States.

 

 

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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.                                                                                                                                                           |   |
|                |       |                    |                                                                                                                                                                                                       |   |
| 10.1                |       |                    | Employment Agreement of Walter Ungerer, effective as  of September 1, 2007.                                                                                                                                |   |
|                |       |                    |                                                                                                                                                                                                       |   |
| 10.2                |       |                    | Employment Agreement of Tashia L. Rivard, effective  as of September 1, 2007.                                                                                                                              |   |
|                |       |                    |                                                                                                                                                                                                       |   |
| 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: November 13, 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. |
|                |       |        |   |
| 10.1                |       |        | Employment Agreement of  Walter Ungerer, effective as of September 1, 2007. |
|                |       |        |   |
| 10.2                |       |        | Employment Agreement of  Tashia L. Rivard, effective as of September 1, 2007. |
|                |       |        |   |
| 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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