##### Table of Contents




---




UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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




For the Quarterly Period Ended
June 30, 2002





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





VYYO INC.


(Exact name of registrant as
specified in its charter)





Delaware

94-3241270(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)





20400 Stevens Creek Boulevard, 8th Floor, 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  ̈





As of August 7, 2002, there were 12,478,429 shares of Common
Stock ($0.0001 par value) outstanding.





---





---

##### Table of Contents




INDEX





VYYO INC.





Page No.PART I.    FINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial Statements (Unaudited)Condensed consolidated balance sheetsJune 30, 2002 and December 31, 2001

3Condensed consolidated statements of operationsthree and six months ended June 30, 2002 and June 30, 2001

4Condensed consolidated statements of cash flowssix months ended June 30, 2002 and June 30, 2001

5Notes to condensed consolidated financial statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings

30Item 2.

Changes in Securities and Use of Proceeds

30Item 3.

Defaults upon Senior Securities

31Item 4.

Submission of Matters to a Vote of Security Holders

31Item 5.

Other Information

32Item 6.

Exhibits and Reports on Form 8-K

32SIGNATURE

33






---

##### Table of Contents




PART I.    FINANCIAL INFORMATION





Item 1.    CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS





Vyyo Inc.


Condensed Consolidated Balance Sheets


(In Thousands)





June 30, 2002


December 31, 2001(Unaudited)AssetsCURRENT ASSETS:Cash and cash equivalents

$
30,290


$
17,380Short-term investments


46,517



66,689Accounts receivable


829



729Inventory


267



693Other


1,051



601Total current assets


78,954



86,092PROPERTY AND EQUIPMENT, net


1,699



1,948GOODWILL


820INTANGIBLE ASSETS


3,091Total assets

$
84,564


$
88,040Liabilities and stockholders equityCURRENT LIABILITIES:Short-term credit

$
820


$Accounts payable


1,095



827Accrued liabilities


6,329



6,546Accrued restructuring liability


2,419



2,815Total current liabilities


10,663



10,188COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.0001 par value at amounts paid in and additional paid in capital; 200,000,000 shares authorized;
12,297,408 and 12,264,140 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively*


228,661



228,122Note receivable from stockholder


(1,037
)Deferred stock compensation






(600
)Accumulated other comprehensive income


194



721Accumulated deficit


(153,917
)


(150,391
)Total stockholders equity


73,901



77,852$
84,564


$
88,040


---

|* |  | Shares issued and outstanding reflect the 1-for-3 reverse stock split which became effective on August 1, 2002. See note 1.
|- |  | ---------------------------------------------------------------------------------------------------------------------------




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




3




---

##### 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 30,2002


2001


2002


2001NET REVENUES

$
1,174


$
1,361


$
2,990


$
2,030COST OF REVENUES (six months ended June 30, 2001, includes $7,914 write-offs of excess inventory and purchase
commitments)


273



1,157



1,178



10,057GROSS PROFIT (LOSS)


901



204



1,812



(8,027
)OPERATING EXPENSES:Research and development


924



4,396



1,958



9,930Selling and marketing


841



2,250



1,924



4,581General and administrative


1,211



1,761



2,520



4,583Charges for restructuring






828







5,401Charge for stock compensation


300



1,426



522



5,438Total operating expenses


3,276



10,661



6,924



29,933OPERATING LOSS


(2,375
)


(10,457
)


(5,112
)


(37,960
)INTEREST AND OTHER INCOME, net


685



1,437



1,586



3,189NET LOSS

$
(1,690
)

$
(9,020
)

$
(3,526
)

$
(34,771
)NET LOSS PER SHARE*Basic and diluted

$
(0.14
)

$
(0.74
)

$
(0.29
)

$
(2.83
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING*Basic and diluted


12,261



12,220



12,273



12,276


---

|* |  | Net loss per share and weighted average number of common shares have been adjusted to reflect the 1-for-3 reverse stock split which became effective on August
1, 2002. See note 1.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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




4




---

##### Table of Contents




Vyyo Inc.


Condensed Consolidated Statements of Cash Flows


(In Thousands)


(Unaudited)





Six Months Ended June 30,2002


2001Cash Flows from Operating Activities:Net loss

$
(3,526
)

$
(34,771
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and other


505



1,531Amortization and charge related to stock compensation


522



5,438Changes in assets and liabilities:Accounts receivable


(51
)


2,264Other current assets


(403
)


579Inventories


426



2,983Accounts payable






(4,442
)Accrued liabilities


(2,881
)


137Restructuring liabilities


(396
)


2,835Net cash used in operating activities


(5,804
)


(23,446
)Investing Activities:Purchase of property and equipment


(11
)


(2,341
)Proceeds from sales and maturities of short-term investments


41,943



28,225Purchase of short-term investments


(22,298
)


(9,874
)Net cash acquired, due to purchase of Shira Computers Ltd.


38Proceeds from sale of property and equipment


2



34Net cash provided by investing activities


19,674



16,044Financing Activities:Repurchase of common stock






(9,057
)Issuance of common stock


40



325Loan to former Chief Executive Officer


(1,000
)Net cash used in financing activities


(960
)


(8,732
)Increase (decrease) in cash and cash equivalents


12,910



(16,134
)Cash and cash equivalents at beginning of year


17,380



33,991Cash and cash equivalents at end of the period

$
30,290


$
17,857





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




5




---

##### 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. (Vyyo or the Company) 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,
2001, included in the annual report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission.





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.





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 of $7.5 million. The write-down was charged to the cost of revenues. 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.





Loss per Share





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




6




---

##### Table of Contents



Vyyo Inc.


Notes to
Consolidated Consolidated Financial Statements(Continued)


(Unaudited)







2.    Inventory





Inventory is comprised of the following:





June 30, 2002

December 31, 2001In thousandsRaw materials

$
25

$
25Work in process


18


109Finished goods


224


559$
267

$
693





3.    Acquisition





On May 14, 2002, the Company entered into a Share Exchange Agreement with Shira Computers Ltd. (Shira), an Israeli privately
held company that provides web-enhanced software and e-commerce products for the prepress and publishing markets, and certain of the shareholders of Shira, pursuant to which the Company has acquired over 99% of the outstanding ordinary shares of
Shira, for an aggregate of 166,027 shares of the Companys common stock (after taking into account the 1-for-3 reverse stock split), which were issued on July 30, 2002. Entities affiliated with Davidi Gilo, the Chairman of the
Board and Chief Executive Officer of the Company and a significant stockholder of the Company, owned an aggregate 50% of Shiras ordinary shares immediately prior to closing of the transaction and received 83,499 of the Companys shares in
the transaction. This transaction allows the Company to diversify its business by adding a different field of operation to the Companys fixed broadband wireless operations.





The purchase price consists of shares of the Companys common stock, which are valued at approximately $540,000, based on the Companys average share price of
$3.24, which was determined based on the closing price from May 12, 2002 to May 16, 2002, which includes two trading days subsequent to the public announcement of the acquisition, and $60,000 of direct acquisition costs. The 83,499 shares acquired
by entities affiliated with Mr. Gilo had a value of approximately $270,537, based on this average share price.





The acquisition was accounted for using the purchase method under FAS 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. Identifiable intangible assets consist of acquired technology and customer list, in the amount of $2,743,000 and $348,000, respectively, each of which has an estimated useful life of up to three years. Goodwill of $820,000 represents the
excess of the purchase price over the fair-value of the net tangible and intangible assets acquired. In accordance with FAS 142, goodwill is not amortized and will be tested for impairment at the least annually.





The consolidated balance sheet as of June 30, 2002, includes the assets and liabilities of Shira. The results of Shiras operations
will be consolidated commencing on July 1, 2002.




7




---

##### Table of Contents



Vyyo Inc.


Notes to
Consolidated Consolidated Financial Statements(Continued)


(Unaudited)







The following is a summary of the total purchase price for this
acquisition:





June 30, 2002In thousandsValue of the Companys shares

$
540Acquisition costs


60Total Purchase Price

$
600Fair value of net tangible assets acquired

$
(3,311
)Identifiable intangible assets


3,091Goodwill


820$
600





The following unaudited pro forma information presents a summary of
the results of the operations of the Company assuming the acquisition of Shira occurred on January 1, 2001 (in thousands except per share amounts):





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001Net revenues

$
1,218


$
2,169


$
3,110


$
3,784Net loss

$
(2,094
)

$
(9,560
)

$
(4,228
)

$
(35,605
)Net loss per shareBasic and diluted

$
(0.17
)

$
(0.77
)

$
(0.34
)

$
(2.86
)Weighted average number of common shares outstandingBasic and diluted


12,427



12,386



12,439



12,442




8




---

##### Table of Contents



Vyyo Inc.


Notes to
Consolidated Consolidated Financial Statements(Continued)


(Unaudited)







4.    Accrued Liabilities





Accrued liabilities consist of the following:





June 30, 2002

December 31, 2001In thousandsCompensation and benefits

$
1,553

$
1,895Warranty


1,400


1,363Withholding tax


1,354


1,268Other


2,022


2,020$
6,329

$
6,546





5.    Accrued Restructuring liability





In 2001, the Company implemented a restructuring program to reduce operating expenses due to the continuing slowdown in the
telecommunication sector and the economy in general. In 2001, the Company recorded charges of $12.8 million, related to excess facilities, abandoned equipment and employees severance and other, related benefits. The restructuring charge and its
utilization are summarized as follows:





Cumulative restructuring charge in 2001

Balance as of December 31, 2001



Balance as of June 30, 2002Utilized in
2002

To be utilizedIn thousandsFacilities

$
4,913

$
2,365

$
98

$
2,267Equipment


2,616








Employees severance and other related benefits


5,298


450


298


152$
12,827

$
2,815

$
396

$
2,419




9




---

##### Table of Contents



Vyyo Inc.


Notes to
Consolidated Consolidated Financial Statements(Continued)


(Unaudited)







6.    Contingencies





Patent matter





In
early 1999 and in April 2000, the Company received written notices from Hybrid Networks, Inc. (Hybrid), in which Hybrid claimed to have patent rights in certain technology and requested that the Company review its products in light of
twelve 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 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 operating results, cash flows and financial condition. No provision
has been included in the financial statements.





Legal claims regarding breach of leasing agreements





A dispute has arisen between the Company and Har Hotzvim Properties Ltd. (Har Hotzvim) with respect to the compliance with a
leasing agreement and an amendment thereto in which the Company leased office space from Har Hotzvim, at Har Hotzvim industrial zone in Jerusalem, Israel. In August 2001, Har Hotzvim filed a statement of claim against the Company and its subsidiary
in Israel, in an aggregate amount of 10 million New Israeli Shekels (NIS), or approximately $2.2 million. However, this amount was claimed for purposes of court fees and the actual amount sought in Har Hotzvim statement of claim is NIS 37 million,
or approximately $8.2 million. Har Hotzvim may modify its statement of claim and increase the claim amount subject to court approval. Har Hotzvim alleges that the Company breached its obligations under the lease agreement. The Company claims that
Har Hotzvims actions constitute a breach of its obligation under this agreement. In addition to its claim and together therewith, Har Hotzvim filed a request for a provisional attachment on the total amount of approximately $2.2 million. The
court partially approved Har Hotzvims request and issued an attachment order in an aggregate amount of NIS 3 million, or approximately $643,000.





Both the Companys and Har Hotzvims claims are in abeyance and at this stage intermediate proceeding are being conducted before the court. The Company believes it has included an adequate
provision in the financial statements to cover the $2.2 million claim; however, the Company has not made provision in its financial statements for the entire potential $8.2 million claim.





Former Chief Executive Officer separation agreement





In April 2002, according to the separation agreement entered into in October 2001, the Companys former Chief Executive Officer 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 non-recourse and is secured solely by the 266,667 options held by such officer and the shares of the Companys common
stock underlying these options.




10




---

##### Table of Contents



Vyyo Inc.


Notes to
Consolidated Consolidated Financial Statements(Continued)


(Unaudited)







7.    Comprehensive Loss





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





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Net loss

$
(1,690
)

$
(9,020
)

$
(3,526
)

$
(34,771
)Unrealized gain (loss) on available-for-sale securities


42



11



(527
)


644Comprehensive loss

$
(1,648
)

$
(9,009
)

$
(4,053
)

$
(34,127
)





8.    Recent Accounting Pronouncements





In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. The statement addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for all fiscal years beginning after June 15, 2002, with early application
permitted. The Company does not expect the adoption of SFAS No. 143 to have a material impact on the Companys financial position, results of operations, or cash flows.





In May 2002, the FASB issued FAS 145, Revision of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002. FAS 145 is effective
for the fiscal periods beginning after May 15, 2002 (as applicable to the Company, January 1, 2003). The Company does not believe that the adoption of FAS 145 will have any material effect on its consolidated financial statements.





In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when the Company commits
to such an activity and also establishes fair value as the objective for initial measurement of the liability. The Company will adopt SFAS 146 for exit disposal activities that are initiated after December 31, 2002. Upon the adoption of SFAS 146,
previously issued financial statements shall not be restated. The Company is currently in the process of evaluating the impact of the adoption of this statement.





9.    Subsequent Events





On August 1, 2002, Vyyo effected a
one-for-three reverse split of its outstanding common stock. See note 1.




11




---

##### 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, 2001, contained in Vyyos Annual Report (Form 10-K) for the
year ended December 31, 2001, 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 Certain Factors That May Affect Future Results following this Managements Discussion and Analysis section, and elsewhere in this report, and in other reports filed with the
Securities and Exchange Commission from time to time under similar captions.





Overview





Commencing in 2001 and continuing through the present, the global telecommunications market, and in particular the fixed wireless
broadband access market, has experienced a significant downturn, and we have experienced a dramatic decrease in the sales of our products. In this environment, we determined that significant expenditures in our historical products and technology
were not justified. As a result, we reduced our workforce by approximately 75% during 2001, and, in doing so, we reduced our research and development expenses in the fixed wireless broadband to minimum levels. While we expect that the
telecommunications market may recover over time, 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 the 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. While we are continuing to operate and develop our traditional wireless
business, we are also exploring a variety of alternatives, including the restructuring, licensing, sale or divestiture of a substantial portion or all of our current fixed wireless broadband technology or assets. In addition to our recent
acquisition of Shira Computers Ltd. (Shira), a provider of web-enhanced software and e-commerce products for the prepress and publishing markets, we also continue to explore alternatives relating to the license, purchase or acquisition
of other products, technology, assets or businesses. See Item 5 below. We have invested, and we expect that we will continue to invest, significant time and resources searching for and investigating new business opportunities. We may not be able to
successfully effect any of these alternatives on a timely basis or at all.





We supply broadband wireless access
systems used by telecommunications service providers to deliver wireless, high-speed data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our
systems as part of their end-to-end network solutions for service providers. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately
$3.5 million for the six months ended June 30, 2002. As of June 30, 2002, our accumulated deficit was approximately $154 million.





In December 2000, our Board of Directors approved a program to repurchase up to 1,333,333 shares of our common stock (as adjusted for our recent reverse stock split). Repurchases may be made from time to time on the open market at
prevailing market prices or in negotiated transactions off the market, subject to market conditions and at the discretion of management. We are under no obligation to purchase any or all of the shares under this repurchase program and may terminate
the program at any time. Any purchases would increase the ownership of our remaining stockholders, including Mr. Gilo, who beneficially owned approximately 5,284,715 shares of common stock as of March 29, 2002, the date of our most recent proxy
statement. As of June 30, 2002, we had repurchased a total of 557,800 shares for approximately $11.3 million.





On
May 14, 2002, Vyyo Inc. entered into a Share Exchange Agreement with Shira Computers Ltd. (Shira), an Israeli privately held company that provides web-enhanced software and e-commerce products for the prepress and publishing markets.
This transaction allows Vyyo to diversify our business by adding a different field of operation to our fixed wireless broadband operations. Shira employs approximately 30 employees as of June 30, 2002, and develops and provides digital prepress
workflow solutions which are web-based and include support for native PDF workflows. Shiras solution automates the prepress production process and facilitates efficient collaboration between customers and printers/tradeshops. Shira sells its
products through a direct sales force, dealers, VARs and reseller/OEM relationships with other vendors.





The Share
Exchange Agreement with Shira and certain of the shareholders of Shira, provides for the acquisition of over 99% of the outstanding ordinary shares of Shira, for an aggregate of 166,027 shares of Vyyos common stock (after taking into account
the 1-for-3 reverse stock split effected on August 1, 2002), which were issued on July 30, 2002. Entities affiliated with Davidi Gilo, the Chairman of the Board and Chief Executive Officer of Vyyo, and a significant stockholder of Vyyo, owned an
aggregate of 50% of Shiras ordinary shares immediately prior to closing of the transaction and received 83,499 of Vyyos shares in the transaction.




12




---

##### Table of Contents




The purchase price consists of shares of the Vyyos common stock, which are
valued at approximately $540,000, based on the Vyyos average share price of $3.24, which was determined based on closing price from May 12, 2002 to May 16, 2002, which includes two trading days subsequent to the public announcement of the
acquisition, and $60,000 of direct acquisition costs. The 83,499 shares acquired by entities affiliated with Mr. Gilo had a value of approximately $270,537, based on this average share price.





The acquisition was accounted for using the purchase method under FAS 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. Identifiable intangible assets consist of acquired technology and customer list, in the amount of $2,743,000 and $348,000, respectively, each of which has an estimated
useful life of up to three years. Goodwill of $820,000 represents the excess of the purchase price under the fair-value of the net tangible and intangible assets acquired. In accordance the FAS 142, goodwill is not amortized and will be tested for
impairment at the least annually. The consolidated balance sheet as of June 30, 2002, includes the assets and liabilities of Shira. The results of Shiras operations will be consolidated commencing on July 1, 2002.





The following is a summary of the total purchase price this acquisition:





June 30, 2002In thousandsValue of Vyyos shares

$
540Acquisition costs


60Total purchase price

$
600Fair value of net tangible assets acquired

$
(3,311
)Identifiable intangible assets


3,091Goodwill


820$
600





Results of Operations





Net Revenues.





Net revenues include product
revenues. Product revenues are derived primarily from sales of hubs and modems initially sold either separately or as a package to telecommunications service providers and to system integrators. Revenues from products and from system integration
products and 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) the collection of
payments 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. License revenues are recognized when the license
technology is delivered.





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





Net revenues decreased by 14% to $1.2 million in the second quarter of 2002 from $1.4 million in the second quarter of 2001, and increased by 47% to $3 million in the first
six months of 2002 from $2 million in the first six months of 2001. The decrease in revenues in the second quarter of 2002 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 frequencies in China to fixed wireless applications. Net revenues
in the second quarter of 2002 include revenues of approximately $443,000 and for the first six months of 2002 $648,000 from sales of inventory that was previously written down to $0 in 2001.




13




---

##### Table of Contents




Cost of Revenues.





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





Cost of revenues decreased in the second quarter of 2002 to
$273,000 from $1.2 million in the second quarter of 2001, and decreased in the first six months of 2002 to $1.2 million from $10 million in the first six months of 2001. The decrease in cost of revenues and the increase in the gross margin in the
second quarter and in the first six months of 2002 was attributable primarily to: (1) charges in the first quarter of 2001 of approximately $7.9 million for excess inventory and purchase commitments, due to the dramatic downturn in the global
telecommunications industry and to the decrease in orders for and sales of our products, and (2) sales in the second quarter of 2002 of inventories that were previously written down to $0 in 2001 by taking a charge of $470,000, and for the first six
months of 2002, $667,000.We believe that cost of revenues will significantly increase, and gross margins will significantly decrease, in the future when and if the products we sell are not taken from inventory that has been previously written down.





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 research and development
activities are carried out in our facility in Jerusalem, Israel. These expenses are charged to operations as incurred. Our research and development expenses decreased to $924,000 in the second quarter of 2002 from $4.4 million in the second quarter
of 2001, and to $2 million in the first six months of 2002 from $9.9 million in the first six months of 2001. These decreases were due to significant reductions in our workforce effected in the second and third quarters of 2001. As of June 30, 2002,
our research and development staff in fixed wireless broadband consisted of 23 employees, compared to 110 employees as of June 30, 2001. As a result of these decreases in research and development activities, we may be unable to develop next
generation products and new products to meet market demand.





Selling and Marketing Expenses.





Selling 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. Selling and marketing expenses decreased to $841,000 in the second quarter of 2002 from $2.3 million in the second quarter of 2001, and to $1.9 million in the first six months of 2002 from $4.6 million
in the first six months of 2001. The decrease in selling and marketing expenses was primarily 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 selling and marketing workforce in the second and third quarters of 2001 and in the first quarter of 2002. In connection with this reduction in the first quarter of 2002, we incurred a one-time
charge of approximately $300,000.





General and Administrative Expenses.





General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business
development, legal, human resources and administration. General and administrative expenses decreased to $1.2 million in the second quarter of 2002 from $1.8 million in the second quarter of 2001, and to $2.5 million in the first six months of 2002
from $4.6 million in the first six months of 2001. The decrease was primarily due to reduction in compensation related expenses resulting from reductions in our workforce in the second and third quarters of 2001. General and administrative expenses
also include expenses we 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 owned by Harmony Management, Inc., of which Davidi Gilo is the sole shareholder. Payment made by us to the management company for the aircraft characters were ultimately paid to Harmony Management, after deductions for certain operating
costs and charter management fees. At the instruction of Harmony Management, the hourly rate charged by the management company for these charters was substantially less than the standard rate charged by the management company for similar charters to
other unaffiliated parties.




14




---

##### Table of Contents




Restructuring Charges.





In 2002, we utilized $396,000 from the restructuring expenses that were accrued in 2001. 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. 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. The excess facilities costs consist of rental payments for unused premises
under current agreements and costs associated with the abandonment of facilities, including lease payments and leasehold improvements invested in these premises and costs associated with the related legal claim against us. Restructuring charges of
$828,000 recorded in the second quarter of 2001 relate mostly to employees severance and other related benefits.





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
for the second quarter of 2002 were $300,000 and $1.4 million in the second quarter of 2001. Amortization and charge in the first six months of 2002 were $522,000, gross charges of $674,000 and a decrease in compensation of $152,000 related to
an accounting variable plan in the first quarter of 2002. As of June 30, 2002, unamortized deferred compensation related to options issued through the completion of the initial public offering amounted to $0.





Interest and Other Income, Net.





Interest and other income, include interest and investment income, mainly from our cash and short-term investment balances from proceeds from our initial and follow-on public offerings effected in 2000. Interest income decreased to
$685,000 in the second quarter of 2002 and $1.4 million in the second quarter of 2001, and decreased to $1.6 million in the first six months of 2002 from $3.2 million in the first six months of 2001. We expect that our interest income will
decrease due to decreasing cash balances and reduced interest rates in financial markets.





Income Taxes.





As of December 31, 2001, we had approximately $60 million of Israeli net operating loss carryforwards, $6 million of United States federal
net operating loss carryforwards, and $6 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 2021. The state net operating loss carryforwards expire in various amounts between the years 2004 and 2006.
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.





Liquidity And Capital Resources.





As of June 30, 2002, we
had $76.8 million of cash, cash equivalents and short-term investments. 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, partially offset by a non-cash charges of $522,000 for deferred stock compensation charges and $505,000 for depreciation. In the first six months of 2001, cash used in operations was $23.4 million, comprised of our net loss of $34.8
million, partially offset by non-cash charges of $5.4 million for stock compensation charges, $1.5 million for depreciation and asset write-down and changes in working capital accounts of $4.4 million.





Investing activities in the first six months of 2002, excluding purchases and proceeds from short-term investments, amounted to
approximately $29,000 for investments in purchase of Shira and in property and equipment. Investing activities in the first six months of 2001, excluding purchases and proceeds from short-term investments, amounted to approximately $2.3 million for
investments in property and equipment.




15




---

##### Table of Contents




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 and partially offset by proceeds from stock option exercises and purchases of stock under the employee stock purchase plan. Financing activities in the first six months of 2001
resulted in a net outflow of $8.7 million due to stock repurchases in the amount of $9.1 million, partially offset by proceeds from stock option exercises.





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





New Accounting Pronouncements.





In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. The statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement
is effective for all fiscal years beginning after June 15, 2002, with early application permitted. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial position, results of operations, or cash flows.





In May 2002, the FASB issued FAS 145, Revision of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as
of April 2002. FAS 145 is effective for the fiscal periods beginning after May 15, 2002 (as applicable to the Company, January 1, 2003). We do not believe that the adoption of FAS 145 will have any material effect on our consolidated financial
statements.





In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is
incurred rather than when we commit to such an activity and also establishes fair value as the objective for initial measurement of the liability. We will adopt SFAS 146 for exit disposal activities that are initiated after December 31, 2002. Upon
the adoption of SFAS 146, previously issued financial statements shall not be restated. We are currently in the process of evaluating the impact of the adoption of this statement.




16




---

##### Table of Contents




CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS





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.





If broadband wireless technology or our implementation of this technology continues not to be broadly accepted, we will not be able to sustain our business and may need to shut it down.





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





If 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.





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





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





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




17




---

##### Table of Contents




If the printing and prepress industry does not grow, or if we do not increase our market share in
this industry, the prospects of our subsidiary, Shira Computers Ltd., may be substantially harmed.





The
printing industry, and in particular the prepress industry, have experienced little or no growth in recent years. The industry is highly fragmented and many vendors operate in this market. In addition, customers and prospective customers of Shira
and other vendors have already invested in significant amounts of printing equipment and software and may not be willing or able to upgrade printing systems or increase expenditures for printing, especially in the current slow global economy. These
factors contribute to an environment characterized by intense competition, lower expenditures by customers and fewer sales opportunities for Shira, and if the global economy does not improve and the printing prepress industry grow, our business
would be harmed and our prospects significantly diminished. In this environment, we will be successful only if we are able to penetrate this market and substantially increase our market share in this industry.





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, and we experienced a dramatic decrease in the sales of our products and the adoption of our technology which has continued through the present. In this environment, we determined that significant
expenditures in our historical products and technology was not justified. As a result, we reduced our workforce by approximately 75% during 2001. As a result of these reductions, we have reduced our research and development expenses to what we
believe are minimum levels. While we expect that the telecommunications market may recover over time, 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 the 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. While we are
continuing to operate and develop our traditional wireless business, we also expect to explore a variety of alternatives, including potential restructuring or the licensing, sale or divestiture of a substantial portion or all of our technology or
assets. In addition to our recent acquisition of Shira Computers Ltd., we also expect to explore alternatives relating to the licensing, purchase or acquisition of other products, technology, assets or businesses. We have invested, and 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.





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





A relatively small number of customers account for a large percentage of our revenues. In the first six months of 2002, Wuhan
Research Institute of Posts and Telecommunication accounted for approximately 33% of our revenues, Dalager Engineering Inc. accounted for approximately 26% of our revenues and Andrew Corporation accounted for approximately 13% of our revenues. In
2001, WorldCom Broadband Solutions, Inc. accounted for approximately 57% of our revenues and Wuhan Research Institute of Posts and Telecommunication accounted for approximately 9% of our revenues. We have not received any new significant orders from
WorldCom, nor do we expect them to continue to deploy a significant number of cities in the foreseeable future. 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.





Because we do not have long-term contracts with our customers, our customers can discontinue purchases of our systems at any time.





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




18




---

##### Table of Contents




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





We recently acquired Shira Computers Ltd., a provider of web-enhanced software and e-commerce products for the prepress and publishing markets. We also continue to explore investments in or acquisitions of other companies,
products or technologies, including companies or technologies that are not complementary or related to our current wireless broadband access business. We have no experience in the printing and graphic arts industry, and we may therefore be
unsuccessful in operating Shira as a profitable business. In addition, we may have difficulty integrating Shiras or other companies personnel, operations, products and technologies into our current business. It also may be difficult to
manage Shira since it is based on the East Coast of the United States. These difficulties may disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, the anticipated benefits of our acquisition of
Shira or any other acquisition may not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other 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 industry.





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 US will use mobile technology such as 3G cellular technology in the
MMDS band, it will harm our business as 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. Any
further delays will adversely affect our customers deployments and could significantly harm our business.





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 $3.5 million in the first six months of 2002 and $34.8 million in the first six months of 2001. As of June
30, 2002, our accumulated deficit was approximately $154 million. In response to the significant decline in our business and revenues in 2001, we have decreased our operating expenses in our wireless business; however, our expenses will continue to
be significantly greater than our gross margin on revenues for the foreseeable future. Our revenues and gross margins may not grow or even continue at their current level and may decline even further. If our revenues do not rapidly increase or if
our gross margins do not increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.





In addition, our new subsidiary Shira Computers Ltd. incurred net losses of $702,000 in the first six months of 2002, and had an accumulated deficit as of June 30, 2002 of $3.3 million. We anticipate that Shira will continue
to incur net losses for the foreseeable future.




19




---

##### Table of Contents




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; and
| | - |  | ------------------------------------------------------------------------------------------------------------------




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




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.





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





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





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




20




---

##### Table of Contents




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





Undetected hardware defects or software errors may increase our costs and impair the market acceptance of our systems.





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.





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





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





Shiras new product, Xpressi, is an
advanced workflow solution, and Shiras business prospects depend in large part on the success of this product in the market. However, the product has to date been installed at only one customer, and there is therefore only a single reference
for this product with which prospective customers can inquire. In addition, the printing prepress market is conservative and slow to adopt new technologies and methodologies. Shira is also generally considered in the industry as a small company
offering software shelf products rather than as a provider of integrated workflow solutions. As a result of these factors, Shira may be unable to convince customers to adopt this product. If Shira is unable to sell Xpressi on a large scale,
Shiras business and prospects would be substantially harmed.





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





Our research and development, final testing and assembly
facilities, and contract manufacturers are located in Israel. A substantial portion of the operations of Shira are also located in Israel. Political, economic and military conditions in Israel directly affect our operations, including those of
Shira. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems
for Israel. Hostilities within Israel have dramatically escalated over the year, which could disrupt our operations. 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, 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.




21




---

##### Table of Contents




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





We have a limited operating history in the broadband point-to-multipoint wireless access market, which may limit your ability to evaluate our business and increase the risk of an investment in Vyyo.





We began commercial shipments of our first-generation broadband wireless access system in the first
quarter of 1999, and we began commercial shipments of our second-generation wireless access system in the fourth quarter of 1999. Our second-generation wireless access system is based on the cable industrys standard set of communications
rules, or protocols, that we have adapted for use in wireless applications. Therefore, the success of our business will be entirely dependent upon the success of our wireless products generally, and our new wireless products in particular. We have a
very limited operating history in the broadband wireless access market upon which to evaluate our future prospects, and the revenue and income potential of our business and market are unproven. Our limited operating history in this market may limit
your ability to evaluate our prospects due to:





| |  |  | our limited historical financial data from our wireless products;
| | - |  | -----------------------------------------------------------------




| |  |  | our unproven potential to generate profits; and
| | - |  | -----------------------------------------------




| |  |  | our limited experience in addressing emerging trends that may affect our business.
| | - |  | ----------------------------------------------------------------------------------




As a young company, we face risks and uncertainties relating to our ability to implement our business plan successfully. You should consider our prospects in light of the
risks, expenses and difficulties we may encounter.





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





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





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





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




22




---

##### Table of Contents




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





Sales outside of North America
accounted for approximately 41% of our revenues in the first six months of 2002 and approximately 16% of our revenues in 2001. We expect that international sales may account for a substantial portion of our revenues in future periods. In addition,
we maintain research and development facilities in Israel. Our reliance on international sales and operations exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:





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




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




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




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




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




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




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





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





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





We depend on our key personnel, in particular Davidi
Gilo, our Chairman of the Board and Chief Executive Officer, and Menashe Shahar, our Chief Technical Officer, the loss of any 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.





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 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. Although we have sufficient inventory of modems on hand to fulfill anticipated demand for the foreseeable future, should our supply of modems be insufficient to meet future demand, our inability to identify and enter into a relationship
with a manufacturer for our modems could harm our business.




23




---

##### Table of Contents




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





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





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





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





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




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




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




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




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




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





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 will increasingly be subject to license
offers and infringement claims as the number of products and competitors in our market grows and the functionality of products overlaps. 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.




24




---

##### Table of Contents




Third parties, including Hybrid, 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, others may independently develop similar technologies or products, duplicate any of our products or design around our patents, and the
patents may not provide us competitive advantages. 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 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 many of our 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 concentrated 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; and
| | - |  | --------------------------------------------------------




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




25




---

##### Table of Contents




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





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 all 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.





Several of our directors and officers have relationships with Davidi Gilo and his affiliated companies that could be deemed to represent a conflict of
interest with us.





Several members of our board of directors, Lewis Broad, Neill Brownstein, Avraham Fischer,
Samuel Kaplan and Alan Zimmerman, and several of our officers, Stephen Pezzola, David Aber and 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 have served on the boards of directors of DSP Communications, Inc. and/or DSP Group, Inc., of which Mr. Gilo was the controlling stockholder and the Chairman of the Board, and these officers have served as officers
of one or both of these two companies or Zen Research, another entity affiliated with Mr. Gilo. In addition, Avraham Fischer is a senior partner of the law firm of Fischer, Behar, Chen & Co., which represents us on matters relating to Israeli
law. There are no family relationships between these directors and officers, and no member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee. However, the long-term and continuing relationships between these directors and officers and Mr. Gilo and his affiliated companies could be deemed to represent a conflict of
interest with us.





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 47% 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.
| | - |  | --------------------------



26




---

##### Table of Contents




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 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 on August 1, 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.




27




---

##### Table of Contents




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 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. We believe that most of our current products are not based on Chief Scientist funded
technology and therefore are not subject to this restriction.





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





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.




28




---

##### Table of Contents




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, 2002, we had cash, cash equivalents and short-term investments of $76.8 million.
Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds that invest in corporate and government fixed income securities that are subject to interest rate risk. We place our investments
with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.





Our
general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with maturity of less than three months at the date of purchase are considered to be cash
equivalents; all 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, 2002





If market interest rates were to increase on June 30, 2002 immediately and
uniformly by 10%, the fair value of the portfolio would decline by approximately $113,000 or approximately 0.17% of the total portfolio (approximately 0.13% of total assets). Assuming that the average yield to maturity on our portfolio at June 30,
2002 remains constant throughout the third quarter of 2002 and assuming that our cash, cash equivalents and short-term investments balances at June 30, 2002 remain constant for the duration of the third quarter of 2002, interest income for the third
quarter of 2002 would be approximately $719,000. Assuming a decline of 10% in the market interest rates at June 30, 2002, interest income for the third quarter of 2002 would be approximately $710,000, which represents a decrease in interest income
of approximately $9,000. 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, 2002. These amounts are determined by considering the
impact of the hypothetical interest rates on the Companys cash equivalents and available-for-sale securities at June 30, 2002, over the remaining contractual lives.




29




---

##### Table of Contents




PART II.    OTHER INFORMATION





Item 1.    LEGAL PROCEEDINGS





As we have previously disclosed, on August 14, 2001, Har Hotzvim Properties Ltd. (Har Hotzvim)
filed a claim against us and our subsidiary, Vyyo Ltd., in the Jerusalem, Israel, District Court, alleging that we and Vyyo Ltd. breached obligations under a lease agreement and an amendment thereto between Vyyo Ltd. and Har Hotzvim. The lease
agreement, as amended, relates to an approximately 93,000 square foot facility in Jerusalem, Israel that Vyyo Ltd. leased from Har Hotzvim. The complaint seeks damages in the amount of NIS 10 million, 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 is NIS 37 million, or approximately $8.2 million. The amount claimed may be increased during the proceedings, subject to the
courts approval. Vyyo Inc. and Vyyo Ltd. have filed a statement of defense of Har Hotzvims claim. In addition to its claim and together therewith, Har Hotzvim has filed a request for provisional attachment on the total amount of
approximately $2.2 million. The court has partially approved Har Hotzvims request and issued an attachment order in an aggregate amount of NIS 3 million, or approximately $643,000. Vyyo Ltd. filed a claim in July 2001 against Har Hotzvim,
claiming that Har Hotzvims actions constitute 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. In September 2001, the proceeding was converted from a declarative relief proceeding to a claim for damages.





Both Har Hotzvims and Vyyo Ltd.s claims are in abeyance as of the date of this report and intermediate proceedings are being conducted before the court. We believe we have included an
adequate provision in our financial statements to cover the $2.2 million claim; however, we have not made provision in our financial statements for the entire potential $8.2 million claim.





We are also involved in litigation incidental to the ordinary course of our business activities. While the results of such litigation cannot be predicted with certainty,
based on our current understanding of the facts, we do not believe that the final resolution of such matters will have a material adverse effect on our consolidated financial position or results of operations.





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 $13.50 per share (not taking into account the 1-for-3 reverse stock split
effected in August 2002) for an aggregate initial public offering of $104.8 million. After deducting the underwriting discounts and commissions of $7.3 million and the offering expenses of approximately $2.6 million, the net proceeds to us from the
offering were approximately $94.9 million.





From April 3, 2000, until June 30, 2002, we used approximately $6.1
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 $54.4 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 $31.5625 per share (not taking into account the 1-for-3 reverse stock split effected in August 2002) 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.




30




---

##### Table of Contents




From September 13, 2000, until June 30, 2002, 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 7, 2002. At the annual meeting, the following matters were voted upon and approved by the stockholders (share numbers below do not reflect the 1-for-3 reverse stock split effected by Vyyo on
August 1, 2002):





|1. |  | The election of two (2) Class II directors to serve for a three-year term until the 2005 annual meeting of stockholders. The results of the voting were as
follows:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | Lewis S. Broad
| | -- |  | --------------

Number of shares voted FOR

32,405,025Number of shares WITHHOLDING AUTHORITY

304,686





| | b. |  | Neill H. Brownstein
| | -- |  | -------------------

Number of shares voted FOR

32,405,025Number of shares WITHHOLDING AUTHORITY

304,686





The other directors whose terms of office as directors have
continued after the annual meeting are Davidi Gilo, Avraham Fischer, John P. Griffin, Samuel L. Kaplan and Alan L. Zimmerman.





|2. |  | Authorization for the Board of Directors to amend the Vyyo Inc. Third Amended and Restated Certificate of Incorporation to effect a one-for-three reverse split
of the outstanding shares of common stock, at any time prior to the 2003 Annual Meeting of Stockholders. The results of the voting were as follows:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Number of shares voted FOR

32,314,410Number of shares voted AGAINST

348,623Number of shares ABSTAINING

46,678Number of Broker Non-Votes

0





|3. |  | 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, 2002. The results of the voting were as follows:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Number of shares voted FOR

32,407,981Number of shares voted AGAINST

272,999Number of shares ABSTAINING

28,731Number of Broker Non-Votes

0




31




---

##### Table of Contents




Item 5.    OTHER INFORMATION





Acquisition of Shira Computers Ltd.





On May 14, 2002, Vyyo Inc. entered into a Share Exchange Agreement (the Exchange Agreement) with Shira Computers
Ltd., an Israeli privately held company (Shira), and certain of the shareholders of Shira, providing for the purchase by Vyyo of all of the outstanding ordinary shares of Shira, for an aggregate of 166,667 shares of Vyyos common
stock. On July 30, 2002, Vyyo issued approximately 166,027 shares of Vyyo common stock to the Shira stockholders in the consummation of the Exchange Agreement. Vyyo anticipates issuing an additional 640 shares of Vyyo common stock to two Shira
shareholders who did not sign the Exchange Agreement, pursuant to Israeli law. On the closing date, the Vyyo shares of common stock issued in the transaction had a value of approximately $423,500, based on the closing price of Vyyos common
stock on July 30, 2002 of $2.55 per share. The issuances of the Vyyo shares of common stock pursuant to the Exchange Agreement were exempt from registration under the Securities Act of 1933, as amended (the Act), in reliance on Section
4(2) of the Act, Regulation D promulgated under the Act, and/or Regulation S promulgated under the Act. Each of the Shira stockholders acquiring Vyyo common stock shares under the Exchange Agreement represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in the transaction.





The share exchange is intended to qualify as a tax-free reorganization under United States law. Upon completion of the transaction, Vyyo acquired over 99% of the
outstanding equity of Shira.





Shira provides web-enhanced software and e-commerce products for the prepress and
publishing markets, which are highly fragmented markets. Shira develops and provides digital prepress workflow solutions which are web-based and include support for native PDF workflows. Shiras solution automates the prepress production
process and facilitates efficient collaboration between customers and printers/tradeshops. Shira sells its products through a direct sales force, dealers, VARs and reseller/OEM relationships with other vendors.





Entities affiliated with Davidi Gilo, the Chairman of the Board and Chief Executive Officer of Vyyo and a significant stockholder of Vyyo,
owned an aggregate of approximately 50% of Shiras ordinary shares immediately prior to the closing of the transaction and received an aggregate of 83,499 Vyyo shares in the transaction. The shares acquired by the entities affiliated with
Davidi Gilo had a value of approximately $212,923, based on the closing price of Vyyos common stock of $2.55 on July 30, 2002. The entities affiliated with Mr. Gilo have indemnified Vyyo against damages resulting from breaches of certain
representations and warranties made by Shira and these entities in the Exchange Agreement, and the Vyyo shares issued to the Gilo entities will be held in escrow for one year to secure the indemnity obligation.





Appointment of David Aber as Chief Financial Officer





On July 30, 2002, Vyyo announced that the Board of Directors has appointed David Aber as Vyyos Chief Financial Officer. Davidi Gilo, who had been serving as interim Chief Financial Officer,
resigned as interim Chief Financial Officer and will continue to serve as Vyyos Chairman of the Board and Chief Executive Officer. Mr Aber will devote part of his time to the business of Vyyo and will devote part of this time as Chief
Financial Officer of Zen Research plc, a United Kingdom company that is wholly owned by entities affiliates with Davidi Gilo. Mr Aber also previously served as Chief Financial Officer of DSP Communications, Inc., a company of which Davidi Gilo was
the Chairman, Chief Executive Officer, and a major stockholder, in 1998 and 1999.





Item 6.    EXHIBITS AND REPORTS ON FORM 8-K





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




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




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




No reports on Form 8-K were filed during the quarter ended June 30, 2002.




32




---

##### 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, 2002








VYYO INC.





By:

/s/    DAVIDI GILODavidi Gilo, Chief Executive Officer (Duly Authorized Officer)





By:

/s/    DAVID ABERDavid Aber, Chief Financial Officer (Duly Authorized Officer and Principal Financial
Officer)




33