##### Table of Contents

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)



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



For the Quarterly Period Ended June 30, 2003



or



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



For the transition period from  to



Commission File Number 0-30189



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VYYO INC.

(Exact name of registrant as specified in its charter)



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



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



---



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).

Yes ̈No  x



As of August 12, 2003, there were 12,724,748 shares of Common Stock ($0.0001 par value) outstanding.



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##### Table of Contents

INDEX



VYYO INC.



|                              |  |                                                                                                            |  | Page No.
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | --------
|PART I. FINANCIAL INFORMATION |  |                                                                                                           
|                              |  |                                                                                                           
|Item 1.                       |  | Condensed Consolidated Financial Statements (Unaudited)                                                    |  |         
|                              |  |                                                                                                           
|                              |  | Condensed consolidated balance sheets-June 30, 2003 and December 31, 2002                                  |  | 3       
|                              |  |                                                                                                           
|                              |  | Condensed consolidated statements of operations-three and six months ended June 30, 2003 and June 30, 2002 |  | 4       
|                              |  |                                                                                                           
|                              |  | Condensed consolidated statements of cash flows-six months ended June 30, 2003 and June 30, 2002           |  | 5       
|                              |  |                                                                                                           
|                              |  | Notes to condensed consolidated financial statements                                                       |  | 6       
|                              |  |                                                                                                           
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 17      
|                              |  |                                                                                                           
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 35      
|                              |  |                                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                                    |  | 36      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                           
|                              |  |                                                                                                           
|Item 1.                       |  | Legal Proceedings                                                                                          |  | 36      
|                              |  |                                                                                                           
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                  |  | 36      
|                              |  |                                                                                                           
|Item 3.                       |  | Defaults upon Senior Securities                                                                            |  | 37      
|                              |  |                                                                                                           
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                        |  | 37      
|                              |  |                                                                                                           
|Item 5.                       |  | Other Information                                                                                          |  | 38      
|                              |  |                                                                                                           
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                           |  | 38      
|                              | 
|SIGNATURES.                   |  | 39                                                                                                        



2



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##### Table of Contents

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements



Vyyo Inc.

Condensed Consolidated Balance Sheets

(In Thousands)



|                                                                                                                                                                                                 |  | June 30,2003 |          |   | December 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | -
|                                                                                                                                                                                                 |  | (Unaudited)  |          |   |                  |  
|Assets                                                                                                                                                                                           |  |              |          |   |                  |  
|CURRENT ASSETS:                                                                                                                                                                                  |  |              |          |   |                  |  
|Cash and cash equivalents                                                                                                                                                                        |  | $            | 15,030   |   |                  | $
|Short-term investments                                                                                                                                                                           |  |              | 48,552   |   |                  |  
|Accounts receivable                                                                                                                                                                              |  |              | 1,263    |   |                  |  
|Inventories (note 2)                                                                                                                                                                             |  |              | 177      |   |                  |  
|Other                                                                                                                                                                                            |  |              | 814      |   |                  |  
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|Total current assets                                                                                                                                                                             |  |              | 65,836   |   |                  |  
|                                                                                                                                                                                                 |  |             
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                      |  |              | 1,048    |   |                  |  
|GOODWILL (note 3)                                                                                                                                                                                |  |              |         |   |                  |  
|IDENTIFIABLE INTANGIBLE ASSETS (note 3)                                                                                                                                                          |  |              |         |   |                  |  
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|Total assets                                                                                                                                                                                     |  | $            | 66,884   |   |                  | $
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|Liabilities and stockholders equity                                                                                                                                                             |  |              |          |   |                  |  
|CURRENT LIABILITIES:                                                                                                                                                                             |  |              |          |   |                  |  
|Accounts payable                                                                                                                                                                                 |  | $            | 978      |   |                  | $
|Accrued liabilities (note 4)                                                                                                                                                                     |  |              | 6,378    |   |                  |  
|Accrued restructuring liability (note 4)                                                                                                                                                         |  |              | 230      |   |                  |  
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|Total current liabilities                                                                                                                                                                        |  |              | 7,586    |   |                  |  
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|CONTINGENCIES (note 5)                                                                                                                                                                           |  |              |          |   |                  |  
|                                                                                                                                                                                                 |  |             
|STOCKHOLDERS EQUITY:                                                                                                                                                                            |  |              |          |   |                  |  
|Common stock, $0.0001 par value and paid in capital; 200,000,000 shares authorized; 12,715,082 and 12,545,036 shares issued and
outstanding at June 30, 2003 and December 31, 2002, respectively |  |              | 229,242  |   |                  |  
|Notes receivable from stockholders                                                                                                                                                               |  |              | (1,037   | ) |                  |  
|Accumulated other comprehensive income                                                                                                                                                           |  |              | 121      |   |                  |  
|Accumulated deficit                                                                                                                                                                              |  |              | (169,028 | ) |                  |  
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|Total stockholders equity                                                                                                                                                                       |  |              | 59,298   |   |                  |  
|                                                                                                                                                                                                 |  |              |          |   |                  |  
|Total liabilities and stockholders equity                                                                                                                                                       |  | $            | 66,884   |   |                  | $
|                                                                                                                                                                                                 |  |              |          |   |                  |  



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



3



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##### Table of Contents

Vyyo Inc.

Condensed Consolidated Statements of Operations

(In Thousands Except Per Share Data)

(Unaudited)



|                                                                     |  | Three Months ended June 30, |        |   | Six Months ended June 30, |  
|-------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                     |  | 2003                        |        |   | 2002                      |  
|NET REVENUES (note 8)                                                |  |                             |        |   |                           |  
|Fixed broadband wireless                                             |  | $                           | 1,786  |   |                           | $
|Software products                                                    |  |                             | 88     |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|Total Net Revenues                                                   |  |                             | 1,874  |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|COST OF REVENUES                                                     |  |                             |        |   |                           |  
|Fixed broadband wireless                                             |  |                             | 460    |   |                           |  
|Software products(1)                                                 |  |                             | 278    |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|Total Cost of Revenues                                               |  |                             | 738    |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|GROSS PROFIT                                                         |  |                             | 1,136  |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|OPERATING EXPENSES:                                                  |  |                             |        |   |                           |  
|Research and development, net                                        |  |                             | 1,493  |   |                           |  
|Selling and marketing                                                |  |                             | 2,059  |   |                           |  
|General and administrative                                           |  |                             | 1,438  |   |                           |  
|Charge for restructuring                                             |  |                             |        |   |                           |  
|Impairment of intangible assets and property and equipment (note 3)  |  |                             | 2,224  |   |                           |  
|Impairment of goodwill (note 3)                                      |  |                             | 420    |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|T o t a l operating expenses                                         |  |                             | 7,634  |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|OPERATING LOSS                                                       |  |                             | (6,498 | ) |                           |  
|INTEREST INCOME, net                                                 |  |                             | 357    |   |                           |  
|                                                                     |  |                             |        |   |                           |  
|NET LOSS                                                             |  | $                           | (6,141 | ) |                           | $
|                                                                     |  |                             |        |   |                           |  
|NET LOSS PER COMMON SHARE                                           |  |                             |        |   |                           |  
|Basic and diluted                                                    |  | $                           | (0.48  | ) |                           | $
|                                                                     |  |                             |        |   |                           |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) |  |                             |        |   |                           |  
|                                                                     |  |                             |        |  
|Basic and diluted                                                    |  |                             | 12,692 |   |                           |  
|                                                                     |  |                             |        |   |                           |  

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|(1) |  | In the three and six months ended June 30, 2003 includes amortization of identifiable intangible assets of $258,000 and $516,000, respectively, from the acquisition of Shira (see
note 3)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



4



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##### Table of Contents

Vyyo Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



|                                                                            |  | Six Months ended June 30, |        
|--------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                            |  | 2003                      |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                           |        
|Net loss                                                                    |  | $                         | (9,404 
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |        
|Income and expenses not involving cash flows:                               |  |                           |        
|Depreciation and amortization                                               |  |                           | 850    
|Impairment of identifiable intangible assets and property and equipment     |  |                           | 2,224  
|Impairment of goodwill                                                      |  |                           | 420    
|Amortization and charge related to stock compensation                       |  |                           |        
|Capital gain on sale of fixed assets                                        |  |                           | (1     
|Changes in assets and liabilities:                                          |  |                           |        
|Accounts receivable                                                         |  |                           | (966   
|Other current assets                                                        |  |                           | (277   
|Inventories                                                                 |  |                           | (98    
|Accounts payable                                                            |  |                           | 13     
|Accrued liabilities                                                         |  |                           | 590    
|Restructuring liabilities                                                   |  |                           | (1,884 
|                                                                            |  |                           |        
|Net cash used in operating activities                                       |  |                           | (8,533 
|                                                                            |  |                           |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                           |        
|Purchase of property and equipment                                          |  |                           | (134   
|Proceeds from sale of property and equipment                                |  |                           | 1      
|Net cash acquired, due to purchase of Shira Computers Ltd.,                 |  |                           |        
|Purchase of short-term investments                                          |  |                           | (39,924
|Proceeds from sales and maturities of short-term investments                |  |                           | 48,422 
|                                                                            |  |                           |        
|Net cash provided by investing activities                                   |  |                           | 8,365  
|                                                                            |  |                           |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                           |        
|Issuance of common stock                                                    |  |                           | 127    
|Loan to former Chief Executive Officer                                      |  |                           |        
|                                                                            |  |                           |        
|Net cash provided by (used in) financing activities                         |  |                           | 127    
|                                                                            |  |                           |        
|Increase (decrease) in cash and cash equivalents                            |  |                           | (41    
|                                                                            |  |                          
|Cash and cash equivalents at beginning of year                              |  |                           | 15,071 
|                                                                            |  |                           |        
|Cash and cash equivalents at end of year                                    |  | $                         | 15,030 
|                                                                            |  |                           |        
|Non-cash financing activities:                                              |  |                           |        
|Issuance of common stock for notes receivable                               |  |                           |        
|                                                                            |  |                           |        



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



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##### Table of Contents

Vyyo Inc.



Notes to Condensed
Consolidated Financial Statements

(Unaudited)



1. Basis of Presentation



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



Organization and Principles of Consolidation



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



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



Accounting Principles



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



Reverse Stock Split



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



Use of Estimates



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



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Inventory



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



During the year 2001, the Company recognized a write-down of excess inventory and purchase commitments of $8.45 million. The write-down was charged to the cost of revenues. In the three and six months ended June 30,
2003, inventory that was previously written-down to $0 by taking a charge of $526,000 and $747,000, respectively, was sold for the amount of $1,490,000 and $1,625,000, respectively. In the three and six months ended June 30, 2002, inventory that was
previously written-down to $0 by taking a charge of $470,000 and $667,000, respectively, was sold for the amount of $443,000 and $648,000, respectively.



Impairment of Long-Lived Assets



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



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



Goodwill



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



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



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



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



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Revenue Recognition



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



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



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



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



Loss per Share



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



Employee Stock Based Compensation



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



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



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Employee Stock Based Compensation (continued)



Pro forma information regarding net loss required under SFAS
No. 148 has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The pro forma net loss per share below reflects both (i) the charge for stock included in the historical net loss and (ii)
the expense allocation based on the SFAS No. 123 calculation. The fair value for stock options was estimated at the date of each option grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three
and six months ended June 30, 2003 and 2002: risk-free interest rates ranging from 1.19% to 5.52%; dividend yields of zero; a weighted-average expected life of the option of approximately 3.12 and 3.74 years; and volatility ranging from 0.36 to
0.71.



The Companys pro forma information is as follows:



|                                                                                                 |  | Three Months ended June 30,        |        |   | Six Months ended June 30,          |  
|------------------------------------------------------------------------------------------------ |  | ---------------------------------- | ------ | - | ---------------------------------- | -
|                                                                                                 |  | 2003                               |        |   | 2002                               |  
|                                                                                                 |  | In thousands(except pershare data) |        |   | In thousands(except pershare data) |  
|Net loss, as reported                                                                            |  | $                                  | (6,141 | ) |                                    | $
|Deduct: stock based employee compensation expense, included in reported net loss                 |  |                                    |        |   |                                    |  
|Add: stock based employee compensation expense determined under fair value method for all awards |  |                                    | (182   | ) |                                    |  
|                                                                                                 |  |                                    |        |   |                                    |  
|Pro forma net loss                                                                               |  | $                                  | (6,323 | ) |                                    | $
|                                                                                                 |  |                                    |        |   |                                    |  
|Basic and diluted loss per share:                                                                |  |                                    |        |   |                                    |  
|As reported                                                                                      |  | $                                  | (0.48  | ) |                                    | $
|                                                                                                 |  |                                    |        |   |                                    |  
|Proforma                                                                                         |  | $                                  | (0.50  | ) |                                    | $
|                                                                                                 |  |                                    |        |   |                                    |  



Reclassifications



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



2. Inventories



Inventory is comprised of the following:



|                |  | June 30,2003 |     | December 31,2002
|--------------- |  | ------------ | --- | ----------------
|                |  | In thousands
|Raw materials   |  | $            | 18  |                 
|Work in process |  |              | 121 |                 
|Finished goods  |  |              | 38  |                 
|                |  |              |     |                 
|                |  | $            | 177 |                 
|                |  |              |     |                 



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. ShiraImpairment charges and cessation of business operations



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



The acquisition was accounted for
using the purchase method under SFAS No. 141. The purchase price was allocated to those assets acquired and liabilities assumed based on the estimated fair value of those assets and liabilities as of June 30, 2002 (acquisition date).
Identifiable intangible assets consist of acquired technology in the amount of $2,743,000 and customer list in the amount of $348,000. Goodwill of $820,000 represents the excess of the purchase price over the fair-value of the net tangible and
identifiable intangible assets acquired.



The Company
amortized the identifiable intangible assets over a period of three years (See also 3(b) below). The amortization of identifiable assets, included in cost of revenues, is as follows:



|                    |  | Three Monthsended June 30,2003 |     | Six Monthsended June 30,2003
|------------------- |  | ------------------------------ | --- | ----------------------------
|                    |  | In thousands                  
|Acquired technology |  | $                              | 228 |                             
|Customer list       |  |                                | 30  |                             
|                    |  |                                |     |                             
|                    |  | $                              | 258 |                             
|                    |  |                                |     |                             



The accumulated
amortization of identifiable intangible assets, excluding impairment charges, as of June 30, 2003, was $1,032,000 of which the accumulated amortization of acquired technology was $912,000 and customer list was $120,000.



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



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. ShiraImpairment charges and cessation of business operations (continued)



| | (c) |  | The changes in the amount of identifiable intangible assets and in the carrying amount of goodwill for the period of three and six months ended June 30, 2003 are as follows:
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                            |  | Acquiredtechnology |        |   | Customer list |   |      | Goodwill | 
|--------------------------- |  | ------------------ | ------ | - | ------------- | - | ---- | -------- | 
|                            |  | In thousands       |       
|Balance as of April 1, 2003 |  | $                  | 2,059  |   |               | $ | 257  |          | 
|Amortization                |  |                    | (228   | ) |               |   | (30  | )        | 
|Impairment                  |  |                    | (1,831 | ) |               |   | (227 | )        | 
|                            |  |                    |        |   |               |   |      |          | 
|Balance as of June 30, 2003 |  | $                  |       |   |               | $ |     |          | 
|                            |  |                    |        |   |               |   |      |          | 



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



| | (d) |  | On August 12, 2003, the Companys Board of Directors determined to cease substantially all of Shiras business operations and terminate substantially all of Shiras
employees. In addition, the Company is exploring the sale of Shiras operations and assets to Shiras management. This decision to close or sell Shira was based on the continuing decline in Shiras sales, Shiras recurring losses
and its inability to penetrate the market.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a
result, the Company recorded approximately $271,000 severance expenses, relating to existing contractual termination benefits of Shiras employees, included in the Companys research and development expenses, sales and marketing expenses
and general and administrative expenses amounting to $162,000, $86,000 and $23,000, respectively. In addition, the Company expects to recognize additional expenses in the third quarter of 2003, ranging between $250,000 and $350,000, associated
mainly with employee termination costs and other contractual obligations. The costs associated with the employee termination will be paid during the second half of 2003.



11



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. ShiraImpairment charges and cessation of business operations (continued)



| | (e) |  | The following unaudited pro forma combined information presents a summary of the results of the operations of the Company and Shira as if the acquisition of Shira had occurred on
January 1, 2002. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisition taken place at the beginning of 2002.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                       |  | Three Monthsended June 30,2002       |        |   | Six Monthsended June 30,2002         |  
|---------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | -
|                                                                       |  | In thousands,except pershare amounts |        |   | In thousands,except pershare amounts |  
|Net revenues                                                           |  | $                                    | 1,218  |   |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Operating loss                                                         |  | $                                    | (2,985 | ) |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Net Loss                                                               |  | $                                    | (2,203 | ) |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Net loss per shareBasic and diluted                                   |  | $                                    | (0.18  | ) |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Weighted average number of common shares outstandingBasic and diluted |  |                                      | 12,427 |   |                                      |  
|                                                                       |  |                                      |        |   |                                      |  



4. Current Liabilities



Accrued liabilities consist of the following:



|                          |  | June 30,2003 |       | December 31,2002
|------------------------- |  | ------------ | ----- | ----------------
|                          |  | In thousands
|Compensation and benefits |  | $            | 2,090 |                 
|Withholding tax           |  |              | 1,588 |                 
|Royalties                 |  |              | 954   |                 
|Warranty *                |  |              | 391   |                 
|Other                     |  |              | 1,355 |                 
|                          |  |              |       |                 
|                          |  | $            | 6,378 |                 
|                          |  |              |       |                 

---

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



|                                                         |  | Six Monthsended June 30,2003 |      |   | Year endedDecember 31,2002 |  
|-------------------------------------------------------- |  | ---------------------------- | ---- | - | -------------------------- | -
|                                                         |  | In thousands                 |     
|Balance at beginning of period                           |  | $                            | 395  |   |                            | $
|Liability acquired upon Shira acquisition                |  |                              |      |   |                            |  
|Payments made under the warranty                         |  |                              |      |   |                            |  
|Product warranty issued for new sales                    |  |                              | 198  |   |                            |  
|Changes in accrual in respect of warranty periods ending |  |                              | (202 | ) |                            |  
|                                                         |  |                              |      |   |                            |  
|Balance at end the of period                             |  | $                            | 391  |   |                            | $
|                                                         |  |                              |      |   |                            |  



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Accrued restructuring liability



In 2001, the Company implemented a restructuring program to reduce operating expenses. The Company recorded
charges of $12.8 million, related to excess facilities, abandoned equipment and employees severance and other related benefits due to a reduction of approximately 180 employees, or approximately 75% of the Companys workforce. In the
three and six months ended June 30, 2003, the Company utilized $31,000 and $1,884,000 from the restructuring expenses, respectively. The remaining restructuring liability balance to be utilized relates to the Companys anticipated loss under a
noncancelable lease agreement until it expires at the end of 2003.



5.
Contingencies



Patent matter



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



Legal Claims regarding breach of leasing agreements



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



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



Former employees
claims



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



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



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



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



7. Comprehensive Loss



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



|                                                 |  | Three Months ended June 30, |        |   | Six Months ended June 30, |  
|------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | -
|                                                 |  | 2003                        |        |   | 2002                      |  
|                                                 |  | In thousands                |        |   | In thousands              |  
|Net loss                                         |  | $                           | (6,141 | ) |                           | $
|Unrealized loss on available-for-sale securities |  |                             | (193   | ) |                           |  
|                                                 |  |                             |        |   |                           |  
|Comprehensive loss                               |  | $                           | (6,334 | ) |                           | $
|                                                 |  |                             |        |   |                           |  



8. Segment Reporting



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



|                                  |  | Three Months ended June 30, |        |   | Six Months ended June 30, |  
|--------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                  |  | 2003                        |        |   | 2002                      |  
|                                  |  | In thousands                |        |   | In thousands              |  
|Net revenues:                     |  |                             |        |   |                           |  
|Fixed broadband wireless          |  | $                           | 1,786  |   |                           | $
|Software Products                 |  |                             | 88     |   |                           |  
|                                  |  |                             |        |   |                           |  
|Consolidated net revenues         |  | $                           | 1,874  |   |                           | $
|                                  |  |                             |        |   |                           |  
|Loss from operations:             |  |                             |        |   |                           |  
|Fixed broadband wireless          |  | $                           | (2,148 | ) |                           | $
|Software Products                 |  |                             | (4,350 | ) |                           |  
|                                  |  |                             |        |   |                           |  
|Consolidated loss from operations |  |                             | (6,498 | ) |                           |  
|Interest income, net              |  |                             | 357    |   |                           |  
|                                  |  |                             |        |   |                           |  
|Net loss                          |  | $                           | (6,141 | ) |                           | $
|                                  |  |                             |        |   |                           |  



14



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



8. Segment Reporting (continued)



|                                       |  | June 30,2003 |        | December 31,2002
|-------------------------------------- |  | ------------ | ------ | ----------------
|                                       |  | In thousands
|Identifiable assets:                   |  |              |        |                 
|Fixed broadband wireless               |  | $            | 66,395 |                 
|Software Products (including goodwill) |  |              | 489    |                 
|                                       |  |              |        |                 
|Consolidated identifiable assets:      |  | $            | 66,884 |                 
|                                       |  |              |        |                 



Sales to major
customers:



|              |  | Three Monthsended June 30, |   |  | Six Monthsended June 30, |  
|------------- |  | -------------------------- | - |  | ------------------------ | -
|              |  | 2003                       |   |  | 2002                     |  
|Net revenues: |  |                            |   |  |                          |  
|Customer A    |  | 76                         | % |  | 15                       | %
|Customer B    |  | 6                          | % |  | 31                       | %
|Customer C    |  |                            |   |  | 23                       | %



9. Recent Accounting Pronouncements



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



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective prospectively for contracts entered into or modified after June 30, 2003 and prospectively for hedging relationships designated after June 30, 2003. The
Company is currently analyzing the impact of this Statement but does not believe that on adoption, it will have a material impact on its results of operations or financial position.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. The Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that these instruments be classified as liabilities in statements
of financial position. This Statement is effective prospectively for financial instruments entered into or modified after May 31, 2003 and otherwise is effective



15



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##### Table of Contents

9. Recent Accounting Pronouncements (continued)



at the beginning of the first interim period beginning after June 15, 2003. This statement shall be implemented by reporting
the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company is currently analyzing the
impact of this Statement.



10. Subsequent event



Regarding the Board of Directors decision to cease Shiras
business operations, see note 3.



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##### Table of Contents

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



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



Overview



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



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



We supply broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed
data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our systems as part of their end-to-end network solutions for service providers. We have
incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $9.4 million for the six months ended June 30, 2003. As of June 30, 2003, our
accumulated deficit was approximately $169 million.



In July
2002, Vyyo acquired Shira, an Israeli privately held company that provides software products for the prepress and publishing markets. In August 2003, due to the continuing decline in Shiras sales, Shiras recurring losses and its
inability to penetrate the market, the Board of Directors of Vyyo decided to cease substantially all of Shiras business operations and terminate substantially all of Shiras employees. In addition, Vyyo is exploring the sale of
Shiras operations and assets to Shiras management; however, if it is unable to negotiate a sale of Shira on acceptable terms, Vyyo expects to complete the winding down of Shira within the next two months.



The acquisition of Shira was accounted for using the purchase method under
SFAS 141. The purchase price was allocated to those assets acquired and liabilities assumed based on the estimated fair value of those assets and liabilities as of June 30, 2002 (acquisition date). Identifiable intangible assets consist
of acquired technology in the amount of $2,743,000 and customer list in the amount of $348,000. Goodwill of $820,000 represents the excess of the purchase price over the fair-value of the net tangible and identifiable intangible assets acquired. The
results of Shiras operations were consolidated from July 1, 2002.



17



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##### Table of Contents

The Company amortized the identifiable intangible assets over a period of three years (See also below).
The amortization of identifiable assets, included in cost of revenues, are as follows:



|                    |  | Three Monthsended June 30,2003 |     | Six Monthsended June 30,2003
|------------------- |  | ------------------------------ | --- | ----------------------------
|                    |  | In thousands                  
|Acquired technology |  | $                              | 228 |                             
|Customer list       |  |                                | 30  |                             
|                    |  |                                |     |                             
|                    |  | $                              | 258 |                             
|                    |  |                                |     |                             



The accumulated
amortization of identifiable intangible assets, excluding impairment charges, as of June 30, 2003, was $1,032,000 of which the accumulated amortization of acquired technology was $912,000 and customer list was $120,000.



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



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



|                            |  | Acquiredtechnology |        |   | Customer list |   |      | Goodwill | 
|--------------------------- |  | ------------------ | ------ | - | ------------- | - | ---- | -------- | 
|                            |  | In thousands       |       
|Balance as of April 1, 2003 |  | $                  | 2,059  |   |               | $ | 257  |          | 
|Amortization                |  |                    | (228   | ) |               |   | (30  | )        | 
|Impairment                  |  |                    | (1,831 | ) |               |   | (227 | )        | 
|                            |  |                    |        |   |               |   |      |          | 
|Balance as of June 30, 2003 |  | $                  |       |   |               | $ |     |          | 
|                            |  |                    |        |   |               |   |      |          | 



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



On August 12, 2003,
the Companys Board of Directors determined to cease substantially all of Shiras business operations and terminate substantially all of Shiras employees. In addition, the Company is exploring the sale of Shiras operations and
assets to Shiras management. This decision was based on the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market. As a result, the Company recorded approximately $271,000 severance
expenses, relating to existing contractual termination benefits of Shiras employees, included in the Companys research and development expenses, sales and marketing expenses and general and administrative expenses amounting to $162,000,
$86,000 and $23,000, respectively. In addition, the Company expects to recognize additional expenses in the third quarter of 2003, ranging between $250,000 and $350,000, associated mainly with employee termination costs and other contractual
obligations. The costs associated with the employee termination will be paid during the second half of 2003.



18



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##### Table of Contents

The following unaudited pro forma combined information presents a summary of the results of the
operations of Vyyo and Shira as if the acquisition had occurred on January 1, 2002. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisition taken place at the
beginning of 2002.



|                                                                       |  | Three Monthsended June 30,2002       |        |   | Six Monthsended June 30,2002         |  
|---------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | -
|                                                                       |  | In thousandsexcept, pershare amounts |        |   | In thousandsexcept, pershare amounts |  
|Net revenues                                                           |  | $                                    | 1,218  |   |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Operating loss                                                         |  | $                                    | (2,985 | ) |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Net Loss                                                               |  | $                                    | (2,203 | ) |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Net loss per shareBasic and diluted                                   |  | $                                    | (0.18  | ) |                                      | $
|                                                                       |  |                                      |        |   |                                      |  
|Weighted average number of common shares outstandingBasic and diluted |  |                                      | 12,427 |   |                                      |  
|                                                                       |  |                                      |        |   |                                      |  



Critical Accounting Policies



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



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



Inventory Valuation. In 2001, due to the dramatic slowdown in the telecommunications sector and the economy in general, we recorded a write-down of
excess inventory and purchase commitments of $8.45 million. Our estimate was based on our expectations for sales of our products in the foreseeable future due to the uncertainty of selling our existing products if and when the market recovers. In
the three and six months ended June 30, 2003, inventory that was previously written-down to $0 by taking a charge of $526,000 and $747,000, respectively, was sold for the amount of $1,490,000 and $1,625,000, respectively. In the three and six months
ended June 30, 2002, inventory that was previously written-down to $0 by taking a charge of $470,000 and $667,000, respectively, was sold for the amount of $443,000 and $648,000, respectively.



Restructuring expenses.In 2001, we implemented a restructuring
program that resulted in a reduction in force of approximately 75% of our employees and in excess facilities and equipment, and accordingly, we recorded a charge of $12.8 million. In the three and six months ended June 30, 2003, we utilized $31,000
and $1.9 million from the restructuring expenses, respectively. The remaining restructuring liability balance to be utilized relates to the Companys anticipated loss under a noncancelable lease agreement expiring at the end of 2003.



Valuation of Identifiable Intangible Assets and Goodwill.Upon the acquisition of Shira, we recorded identifiable intangible assets of $3,091,000 and goodwill of $820,000. We amortized the identifiable assets over a period of three years. We assessed the identifiable intangible assets and goodwill for
recoverability through the



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estimated future cash flows resulting from the use of the assets. Our assessment for recoverability, based on Shiras valuation as of June 30, 2003,
resulted in impairment charges of $2,644,000, out of which $1,831,000 related to the acquired technology, $227,000 related to the customer list, $420,000 related to the goodwill recorded upon Shiras acquisition and $166,000 related to property
and equipment.



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



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



Results of Operations



Net Revenues



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



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



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



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



Net revenues increased by 60% to $1.9 million in the second quarter of 2003
from $1.2 million in the second quarter of 2002, and decreased by 21% to $2.4 million in the first six months of 2003 from $3 million in the first six months of 2002. Net revenues included $88,000 in the second quarter of 2003, and $227,000 in the
first six months of 2003 from Software Products. The increase in revenues in the second quarter of 2003 primarily reflects the increase shipments of our products, particularly to the China market. The decrease in revenues in the first six months of
2003 primarily reflects a reduction of capital spending and further tightening of financial markets in the telecommunication industry, which has reduced our potential customers ability to secure financing and purchase equipment, and, to a
lesser extent, also reflects delays in allocation of the 3.5 GHz frequency in China to fixed wireless applications. Net revenues include revenues from sales of inventory that was previously written down to $0 in 2001 of approximately $1.5 million in
the second quarter of 2003 and $443,000 in the second quarter of 2002, and of approximately $1.6 million in the first six months of 2003 and $648,000 in the first six months of 2002. As a result of the write-down in 2001, the cost of revenues
associated with the sales of this inventory has been accounted for as $0.



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Cost of Revenues



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



Cost of revenues increased to $738,000 in the second quarter of 2003 from $273,000 in the second quarter of 2002, and decreased to $1.1 million in the first six months of 2003 from $1.2 million in the first six months of 2002. Cost of
revenues included approximately $278,000 in the second quarter of 2003, and $562,000 in the first six months of 2003 from Software Products (including amortization of identifiable tangible assets acquired of $258,000 and $516,000, respectively). The
increase in cost of revenues in the second quarter of 2003 was primarily attributable to the increase from shipments of our products and purchases of new inventories. The decrease in cost of revenues and in the gross margin in the first six months
of 2003 was primarily attributable to the decrease in our net revenues in the first quarter of 2003. As a result of the write-down of inventories to $0 in 2001, cost of revenues does not include $526,000 in the second quarter of 2003 and $470,000 in
the second quarter of 2002, and $747,000 in the first six months of 2003 and $667,000 in the first six months of 2002, related to the sale of such inventories. We anticipate that our cost of revenues will increase, and our gross margin will
decrease, in future periods as and to the extent that we deplete our previously written-down inventories and sell products from newly acquired inventories. While we expect that the telecommunications industry may recover over time, substantial
uncertainty exists as to our ability to sell our existing products if and when the market recovers.



Research and Development Expenses



Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Substantially all of our wireless research and development activities
are carried out in our facility in Jerusalem, Israel, and our software research and development activities in Shira are carried out in our facility in Kfar Saba, Israel. These expenses are charged to operations as incurred. Grants received from the
Office of the Chief Scientist at the Ministry of Industry and Trade in Israel are deducted from research and development expenses. Our research and development expenses increased to $1.5 million in the second quarter of 2003 from $1 million in the
second quarter of 2002, and to $2.7 million in the first six months of 2003 from $2.1 million in the first six months of 2002. Research and development expenses included approximately $547,000 for the second quarter of 2003, and $985,000 for the
first six months of 2003 from Software Products. The increase in research and development expenses in 2003 was due to an increase in the second quarter of 2003 in development efforts for new wireless products, additional expenses that we incurred
from Software Products. The increase in expenses in the first six months of 2003 was partially offset by a decrease in expenses in our wireless business in 2003 due to the previous reductions in our workforce and subcontractors, effected in the
third and fourth quarters of 2002. Although we have recently increased our research and development expenses, as a result of the previous decreases in research and development activities, we may be unable to develop next generation products and new
products to meet the demands of the market. We anticipate that research and development expenses will increase in future periods as we increase our efforts to develop new wireless products to address the China market and other new markets. As a
result of decreases in research and development activities from Software Products effected in the third quarter of 2003, we may be unable to develop next generation products and new products to meet the demands of the Software Products
market.



Selling and Marketing Expenses



Sales and marketing expenses consist of salaries and related costs of sales
and marketing employees, consulting fees and expenses for travel, trade shows and promotional activities. Sales and marketing expenses increased to $2.1 million in the second quarter of 2003 from $841,000 in the second quarter of 2002, and to $3.3
million in the first six months of 2003 from $2 million in the first six months of 2002. Sales and marketing expenses include approximately $912,000 in the second quarter of 2003, and $1.6 million in the first six months of 2003 from Software
Products. The increase in sales and marketing expenses in the first six months of 2003 was due to an increase in the second quarter of 2003 in sales efforts for our wireless products in China and other new markets, including a marketing agreement
with one of our Chinese customers amounting to $440,000 in the second quarter of 2003, and due to the additional expenses that we incurred from Software Products. The increase in expenses in the first six months of 2003 was partially offset by a
decrease in expenses in our wireless business due



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to previous reductions in the number of sales and marketing personnel and the level of trade show and other promotional activities effected in 2002 in
response to the significant downturn in the global telecommunications industry and the decrease in orders for and sales of our products. As part of this reduction in expenses, we effected a reduction in our sales and marketing workforce in the first
quarter of 2002. In connection with this reduction in the first quarter of 2002, we incurred a one-time charge of approximately $300,000. We anticipate that sales and marketing expenses will increase in future periods as we increase our efforts to
sell our products in the China market and other new markets.



General and
Administrative Expenses



General and administrative
expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, human resources and legal. General and administrative expenses decreased to $1,438
thousands in the second quarter of 2003 from $1,451 thousands in the second quarter of 2002, and to $2.7 million in the first six months of 2003 from $3 million in the first six months of 2002. General and administrative expenses included
approximately $56,000 in the second quarter of 2003 and $99,000 in the first six months of 2003 from Software Products. The decrease in general and administrative expenses was primarily due to charges for stock compensation of approximately $240,000
recorded in the second quarter of 2002 and $480,000 recorded in the first six months of 2002. The decrease was partially offset by an increase in professional fees in the first six months of 2003 and additional expenses that we incurred from
Software Products. General and administrative expenses also included expenses of $528,000 for the first six months of 2003, paid to an unaffiliated third party management company in connection with several charters of an aircraft for business travel
purposes. While we chartered the aircraft directly from the management company, the chartered aircraft is leased by Harmony Management, Inc., of which Davidi Gilo and his wife are the sole shareholders. Payments made by us to the management company
for the aircraft charters were ultimately paid to Harmony Management, after deductions for certain operating costs and charter management fees. Harmony Management has advised us that the hourly rate charged by the management company for these
charters was substantially less than the standard rate charged for similar charters to other unaffiliated parties.



Impairment of intangible assets, property and equipment and goodwill



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



Restructuring Charges



In 2001, we implemented a restructuring program to reduce operating expenses
due to the dramatic and continuing slowdown in the telecommunications sector and the general economy. In connection with this restructuring, we recorded charges of $12.8 million in 2001. These charges are costs related to excess facilities,
abandoned equipment and employees severance and other related benefits. The restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of our workforce. We utilized $31,000 in the second quarter of 2003,
and $1,884,000 in the first six months of 2003 from the accrued restructuring liability. The remaining restructuring liability balance to be utilized relates to our anticipated loss under a noncancelable lease agreement expiring at the end of 2003.



Interest Income, Net



Interest income, net, includes interest and investment income, foreign
currency remeasurement gains and losses. Net interest income was $357,000 in the second quarter of 2003 and $685,000 in the second quarter of 2002, and $776,000 in the first six months of 2003 and $1.6 million in the first six months of 2002, mainly
from our cash and short-term investment balances from proceeds from our initial and follow-on public offerings effected in 2000.



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We expect that our interest income will continue to decrease due to decreasing cash balances and reduced interest rates in financial markets.



Income Taxes



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



Charge for Stock Based Compensation



Charge for stock compensation represents the amortization of deferred
compensation charges which are based on the aggregate differences between the respective exercise price of stock options and purchase price of stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting
purposes, as well as stock compensation charges incurred in connection with modifications of stock awards in 2001. Deferred stock compensation is amortized over the vesting period of the underlying options. Amortization and charge related to stock
compensation were $0 in the second quarter of 2003 and $300,000 in the second quarter of 2002. The charges for stock compensation were $0 in the first six months of 2003 and gross charges of $674,000 in the first six months of 2002, with a decrease
in compensation of $152,000 related to an accounting variable plan in the first quarter of 2002.



Liquidity and Capital Resources



As of June 30, 2003, we had $63.6 million of cash, cash equivalents and short-term investments. In the first six months of 2003, net cash used in operations was $8.5 million, comprised of our net loss of $9.4 million and changes in other
working capital accounts of $2.6 million, capital gain of $1,000, and partially offset by a non-cash charges of $850,000 for depreciation and amortization, $2.6 million of impairment of identifiable intangible assets, property and equipment and
goodwill. In the first six months of 2002, cash used in operations was $5.8 million, comprised of our net loss of $3.5 million and changes in other working capital accounts of $3.3 million, and partially offset by a non-cash charges of $522,000 for
deferred stock compensation charges and $505,000 for depreciation and amortization.



In the first six months of 2003, net cash provided by investing activities was $8.4 million, comprised of our proceeds from sales and maturities of short-term investments net of our purchase of short-term investments
of $8.5 million, proceeds from sale of property and equipment amounting to approximately $1,000, and partially offset by an outflow of approximately $134,000 for investments in property and equipment. In the first six months of 2002, net cash
provided by investing activities was $19.7 million, comprised of our proceeds from sales and maturities of short-term investments net of our purchase of short-term investments of $19.6 million, the inflow cash activities were, net cash acquired, due
to the purchase of Shira, of $38,000 and proceeds from sale of property and equipment amounting to approximately $2,000, and partially offset by an outflow of approximately $11,000 for investments in property and equipment.



Financing activities in the first six months of 2003 amounted to
approximately $127,000 of proceeds from purchases of stock under the employee stock purchase plan. Financing activities in the first six months of 2002 resulted in a net outflow of approximately $960,000 from a loan to our former Chief Executive
Officer in an amount of $1 million and partially offset by proceeds from stock option exercises and purchases of stock under the employee stock purchase plan.



Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of



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



New Accounting Pronouncements



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



In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective prospectively for
contracts entered into or modified after June 30, 2003 and prospectively for hedging relationships designated after June 30, 2003. We are currently analyzing the impact of this Statement but do not believe that on adoption, it will have a material
impact on our results of operations or financial position.



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement improves the accounting for certain financial instruments that, under previous guidance, issuers
could account for as equity and requires that these instruments be classified as liabilities in statements of financial position. This Statement is effective prospectively for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement shall be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the beginning of the interim period of adoption. We are currently analyzing the impact of this Statement.



RISK FACTORS



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



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



We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable
future. We incurred net losses of approximately $9.2 million in 2002 and $9.4 million in the first six months of 2003. As of June 30, 2003, our accumulated deficit was approximately $169 million. In response to the significant decline in our
business and revenues which began in 2001 and has continued through the present, we have decreased our operating expenses in our wireless business; however, our expenses will continue to be significantly greater than our gross margin on revenues for
the foreseeable future. In addition, we recently



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increased our sales and marketing expenditures and research and development expenditures in connection with our increased efforts in China. Our revenues and
gross margins may not grow or even continue at their current level and may decline even further. Our gross margins have been favorably affected by sales of inventory that had been previously written off. If our revenues do not rapidly increase, or
if our expenses increase at a greater pace than our revenues, we will never become profitable.



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



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



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



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



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



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



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



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



Sales outside of North America accounted for approximately 72% of our
revenues in the first six months of 2003 and 34% of our revenues in 2002. Sales to China accounted for approximately 89% of our revenues outside of North America in the first six months of 2003 and approximately 73% of our sales outside of North
America in 2002. We expect that international sales, and in particular sales to China, will account for a substantial portion of



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our revenues in future periods. In addition, we maintain research and development facilities in Israel. Our reliance on international sales and operations
exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:



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



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



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



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



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



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



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



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



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



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



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



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



A relatively small number of customers account for a large percentage of our revenues. In the first six months of 2003, Wuhan Research Institute of Posts
and Telecommunication accounted for approximately 60% of our revenues (62% of our wireless revenues); and Dalager Engineering Inc. accounted for approximately 12% of our revenues (13% of our wireless revenues).



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Several members of our board of directors, Lewis Broad, Neill Brownstein, Avraham Fischer, Samuel Kaplan and Alan Zimmerman, and our President and Chief Operating Officer, Michael Corwin, have had professional
relationships with our Chairman of the Board, Davidi Gilo, and his affiliated companies for several years. These members of our board of directors previously served on the boards of directors of DSP Communications, Inc. and/or DSP Group, Inc., of
which Mr. Gilo was formerly the controlling stockholder and the Chairman of the Board, and Mr. Corwin previously served as an officer of DSP Group. In addition, Avraham Fischer is a senior partner of the law firm of Fischer, Behar, Chen & Co.,
which represents us on matters relating to Israeli law, and is an investor and co-Chief Executive Officer of an Israeli investor group in which Mr. Gilo is also



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an investor. There are no family relationships between these directors and officers, and no member of our compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. However, the long-term relationships between these directors and officers and
Mr. Gilo and his affiliated companies could be deemed to limit their independence.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



In order for our common stock to
continue to be quoted on the Nasdaq National Market, we must satisfy various listing maintenance standards established by Nasdaq, including the requirement that our common stock maintain a minimum bid price of at least $1.00 per share. Under
Nasdaqs listing maintenance standards, if the closing bid price of our common stock remains below $1.00 per share for 30 consecutive trading days, Nasdaq will issue a deficiency notice to Vyyo. If the closing bid price subsequently does not
reach $1.00 per share or higher



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



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



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



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



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



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



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



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



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



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



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



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



As of June 30, 2003, we had cash, cash equivalents and short-term investments of $63.6 million. Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds
that invest in corporate and government fixed income securities that are subject to interest rate risk. We place our investments with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.



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



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



Quantitative Interest
Rate Disclosure As of June 30, 2003



If market interest
rates were to increase on June 30, 2003 immediately and uniformly by 10%, the fair value of the portfolio would decline by approximately $45,000 or approximately 0.1% of the total portfolio (approximately 0.1% of total assets). Assuming that the
average yield to maturity on our portfolio at June 30, 2003 remains constant throughout the third quarter of 2003 and assuming that our cash, cash equivalents and short-term investments balances at June 30, 2003 remain constant for the duration of
the third quarter of 2003, interest income for the third quarter of 2003 would be approximately $697,000. Assuming a decline of 10% in the market interest rates at June 30, 2003, interest income for the third quarter of 2003 would be approximately
$695,000, which represents a decrease in interest income of approximately $2,000. The decrease in interest income will result in a decrease of the same amount to net income and cash flows from operating activities for the three months ended June 30,
2003. These amounts are determined by considering the impact of the hypothetical interest rates on our cash equivalents and available-for-sale securities at June 30, 2003, over the remaining contractual lives.



Item 4. Controls and Procedures



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



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



PART II. OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



None



Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



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



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of $7.3 million and the offering expenses of approximately $2.6 million, the net proceeds to us from the offering were approximately $94.9 million.



From April 3, 2000, until June 30, 2003, we used approximately
$6.5 million of the net offering proceeds for purchases of property, plant and equipment, approximately $2.4 million of the net proceeds for repayment of short term debt obligations, approximately $11.4 million of the net proceeds for repurchase of
our common stock, and approximately $62.3 million of the net offering proceeds for working capital.



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



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



Item 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



The Vyyo Inc. annual meeting of stockholders was held on May 12, 2003. At the annual meeting, the following matters were voted upon and approved by the stockholders:



1. The election of two (2) Class III directors to serve for a three-year term until the 2006
annual meeting of stockholders. The results of the voting were as follows:



a.
Samuel L. Kaplan



|Number of shares voted FOR             |  | 11,577,699
|-------------------------------------- |  | ----------
|Number of shares WITHHOLDING AUTHORITY |  | 41,575    



b. Alan L. Zimmerman



|Number of shares voted FOR             |  | 11,555,876
|-------------------------------------- |  | ----------
|Number of shares WITHHOLDING AUTHORITY |  | 63,398    



The other directors whose terms of
office as directors have continued after the annual meeting are Davidi Gilo, Lewis S. Broad, Neill H. Brownstein, Avraham Fischer, and John P. Griffin.



2. Ratification of the appointment of Kesselman & Kesselman CPAs (ISR), a member of PricewaterhouseCoopers International Limited, as independent auditors of Vyyo Inc.
for the fiscal year ending December 31, 2003. The results of the voting were as follows:



|Number of shares voted FOR     |  | 11,616,290
|------------------------------ |  | ----------
|Number of shares voted AGAINST |  | 2,984     
|Number of shares ABSTAINING    |  | -0-       
|Number of Broker Non-Votes     |  | -0-       



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Item 5. OTHER INFORMATION



In
July 2002, Vyyo acquired Shira Computers Ltd. (Shira), an Israeli privately held company that provides software products for the prepress and publishing markets. On August 12, 2003, Vyyos Board of Directors determined to cease
substantially all of Shiras business operations and terminate substantially all of Shiras employees. In addition, Vyyo is exploring the sale of Shiras operations and assets to Shiras management; however, if it is unable to
negotiate a sale of Shira on acceptable terms, Vyyo expects to complete the winding down of Shira within the next two months. This decision was based on the continuing decline in Shiras sales, Shiras recurring losses and its inability to
penetrate the market. Vyyo would likely receive only minimal value, if any, in a sale of Shira.



As a result, the Company recorded approximately $271,000 severance expenses, relating to existing contractual termination benefits of Shiras
employees, included in the Companys research and development expenses, sales and marketing expenses and general and administrative expenses amounting to $162,000, $86,000 and $23,000, respectively. In addition, the Company expects to recognize
additional expenses in the third quarter of 2003, ranging between $250,000 and $350,000, associated mainly with employee termination costs and other contractual obligations. The costs associated with the employee terminations will be paid during the
second half of 2003.



Item 6. EXHIBITS AND REPORTS ON FORM 8-K



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



| | 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 Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------



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



On April 14, 2003, Vyyo filed a report on Form 8-K furnishing under Item 9 of Form 8-K, and pursuant to Item 12 of Form 8-K, its financial results for the
quarter ended March 31, 2003.



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##### Table of Contents

SIGNATURES



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



Date: August 14, 2003



|VYYO INC.
|---------
|         
|By:      
|         
|         
|         
|By:      
|         
|         



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