##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the Quarterly Period Ended September 30, 2004



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 000-30189



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VYYO INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3241270                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



4015 Miranda Avenue,
First Floor, Palo Alto, California 94304

(Address of Principal Executive Offices) (Zip Code)



Registrants telephone number, including area code (650) 319-4000



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



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



As of November 9, 2004, there were 14,910,110 shares of Common Stock ($0.0001 par value)
outstanding.



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##### Table of Contents

INDEX



VYYO INC.



|                              |  |                                                                                                                       |  |         
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                       |  | Page No.
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                                      
|Item 1.                       |  | Condensed Consolidated Financial Statements (Unaudited)                                                               |  |         
|                              |  |                                                                                                                      
|                              |  | Condensed Consolidated Balance SheetsSeptember 30, 2004 and December 31, 2003                                        |  | 3       
|                              |  |                                                                                                                      
|                              |  | Condensed Consolidated Statements of Operationsthree and nine months ended September 30, 2004 and September 30, 2003 |  | 4       
|                              |  |                                                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flowsnine months ended September 30, 2004 and September 30, 2003           |  | 5       
|                              |  |                                                                                                                      
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                  |  | 6       
|                              |  |                                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 18      
|                              |  |                                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 42      
|                              |  |                                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                                               |  | 43      
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                                     |  | 43      
|                              |  |                                                                                                                      
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                             |  | 43      
|                              |  |                                                                                                                      
|Item 3.                       |  | Defaults upon Senior Securities                                                                                       |  | 43      
|                              |  |                                                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 43      
|                              |  |                                                                                                                      
|Item 5.                       |  | Other Information                                                                                                     |  | 44      
|                              |  |                                                                                                                      
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                      |  | 44      
|                              | 
|SIGNATURES.                   |  | 45                                                                                                                   



2



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##### Table of Contents

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements



Vyyo Inc.

Condensed Consolidated Balance Sheets

(In Thousands)



|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                      |  | September 30,2004 |          |   | December 31,2003 |  
|                                                                                                                                                                                                      |  | (Unaudited)       |          |   |                  |  
|Assets                                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|CURRENT ASSETS:                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                             |  | $                 | 9,052    |   |                  | $ | 12,930   |  
|Short-term investments                                                                                                                                                                                |  |                   | 38,248   |   |                  |   | 44,861   |  
|Accounts receivable                                                                                                                                                                                   |  |                   | 1,787    |   |                  |   | 1,416    |  
|Inventories (note 2)                                                                                                                                                                                  |  |                   | 2,896    |   |                  |   | 1,192    |  
|Other                                                                                                                                                                                                 |  |                   | 962      |   |                  |   | 551      |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                  |  |                   | 52,945   |   |                  |   | 60,950   |  
|                                                                                                                                                                                                      |  |                  
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                           |  |                   | 1,171    |   |                  |   | 855      |  
|INTANGIBLE ASSETS(note 3)                                                                                                                                                                             |  |                   | 7,565    |   |                  |   |          |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                          |  | $                 | 61,681   |   |                  | $ | 61,805   |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                      |  | $                 | 2,030    |   |                  | $ | 1,069    |  
|Accrued liabilities (note 5)                                                                                                                                                                          |  |                   | 8,200    |   |                  |   | 5,786    |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                             |  |                   | 10,230   |   |                  |   | 6,855    |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|CONTINGENCY (note 7)                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                                      |  |                  
|STOCKHOLDERS EQUITY:                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Common stock, $0.0001 par value and paid in capital; 200,000,000 shares authorized; 14,910,110 and 12,997,059 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively |  |                   | 240,677  |   |                  |   | 231,523  |  
|Notes receivable from stockholders                                                                                                                                                                    |  |                   | (1,037   | ) |                  |   | (1,037   | )
|Accumulated other comprehensive loss                                                                                                                                                                  |  |                   | (253     | ) |                  |   | (171     | )
|Accumulated deficit                                                                                                                                                                                   |  |                   | (187,936 | ) |                  |   | (175,365 | )
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                            |  |                   | 51,451   |   |                  |   | 54,950   |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                            |  | $                 | 61,681   |   |                  | $ | 61,805   |  
|                                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  



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



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Vyyo Inc.

Condensed Consolidated Statements of Operations

(In Thousands Except Per Share Data)

(Unaudited)



|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                      |  | Three Months endedSeptember 30, |        |   | Nine Months endedSeptember 30, |  
|                                                                      |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|REVENUES (note 10)                                                    |  | $                               | 913    |   |                                | $ | 2,223  |      |  | $ | 5,524   |   |  | $ | 4,355   |  
|COST OF REVENUES                                                      |  |                                 | 988    |   |                                |   | 690    |      |  |   | 3,210   |   |  |   | 1,236   |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|GROSS PROFIT (LOSS)                                                   |  |                                 | (75    | ) |                                |   | 1,533  |      |  |   | 2,314   |   |  |   | 3,119   |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OPERATING EXPENSES (INCOME):                                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                              |  |                                 | 1,887  |   |                                |   | 1,083  |      |  |   | 4,370   |   |  |   | 2,832   |  
|Acquisition of research and development in process (note 3)           |  |                                 |        |   |                                |   |        |      |  |   | 1,402   |   |  |   |         |  
|Selling and marketing                                                 |  |                                 | 3,230  |   |                                |   | 1,124  |      |  |   | 5,806   |   |  |   | 2,876   |  
|General and administrative, net                                       |  |                                 | 1,317  |   |                                |   | 995    |      |  |   | 4,062   |   |  |   | 3,627   |  
|Amortization of intangible assets (note 3)                            |  |                                 | 522    |   |                                |   |        |      |  |   | 522     |   |  |   |         |  
|Restructuring adjustments (note 8)                                    |  |                                 | (243   | ) |                                |   | (24    | )    |  |   | (792    | ) |  |   | (24     | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                              |  |                                 | 6,713  |   |                                |   | 3,178  |      |  |   | 15,370  |   |  |   | 9,311   |  
|OPERATING LOSS                                                        |  |                                 | (6,788 | ) |                                |   | (1,645 | )    |  |   | (13,056 | ) |  |   | (6,192  | )
|INTEREST INCOME, net                                                  |  |                                 | 117    |   |                                |   | 329    |      |  |   | 474     |   |  |   | 1,118   |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|LOSS FROM CONTINUING OPERATIONS                                       |  |                                 | (6,671 | ) |                                |   | (1,316 | )    |  |   | (12,582 | ) |  |   | (5,074  | )
|DISCONTINUED OPERATIONS (note 4)                                      |  |                                 | 61     |   |                                |   | (1,276 | )    |  |   | 11      |   |  |   | (6,921  | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|LOSS FOR THE PERIOD                                                   |  | $                               | (6,610 | ) |                                | $ | (2,592 | )    |  | $ | (12,571 | ) |  | $ | (11,995 | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|LOSS PER COMMON SHARE -                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted:                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Continuing operations                                                 |  | $                               | (0.45  | ) |                                | $ | (0.10  | )    |  | $ | (0.92   | ) |  | $ | (0.40   | )
|Discontinued operations                                               |  |                                 | 0.00   |   |                                |   | (0.10  | )    |  |   | 0.00    |   |  |   | (0.55   | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                      |  | $                               | (0.45  | ) |                                | $ | (0.20  | )    |  | $ | (0.92   | ) |  | $ | (0.95   | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) - |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                      |  |                                 |        |  
|Basic and diluted                                                     |  |                                 | 14,699 |   |                                |   | 12,722 |      |  |   | 13,652  |   |  |   | 12,691  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



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



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Vyyo Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



|                                                                        |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                        |  | Nine Months endedSeptember 30, |        
|                                                                        |  | 2004                           |         |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |  |                                |         |   |      |   |         |  
|Loss for the period                                                     |  | $                              | (12,571 | ) |      | $ | (11,995 | )
|Adjustments to reconcile loss to net cash used in operating activities: |  |                                |         |   |      |   |         |  
|Income and expenses not involving cash flows:                           |  |                                |         |   |      |   |         |  
|Depreciation and amortization ($258,000 related to Shira in 2003)       |  |                                | 1,003   |   |      |   | 1,103   |  
|Impairment of identifiable intangible assets and property and equipment |  |                                |         |   |      |   | 2,224   |  
|Impairment of goodwill                                                  |  |                                |         |   |      |   | 420     |  
|Acquisition of research and development in process                      |  |                                | 1,402   |   |      |   |         |  
|Adjustments related to stock compensation, net                          |  |                                | (428    | ) |      |   | 136     |  
|Capital gain on sale of fixed assets                                    |  |                                | (44     | ) |      |   | (1      | )
|Changes in assets and liabilities:                                      |  |                                |         |   |      |   |         |  
|Accounts receivable                                                     |  |                                | (371    | ) |      |   | (684    | )
|Other current assets                                                    |  |                                | 70      |   |      |   | (195    | )
|Inventories                                                             |  |                                | (1,704  | ) |      |   | (741    | )
|Accounts payable                                                        |  |                                | 654     |   |      |   | 722     |  
|Accrued liabilities                                                     |  |                                | 1,447   |   |      |   | 815     |  
|Restructuring liabilities                                               |  |                                |         |   |      |   | (2,079  | )
|                                                                        |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                   |  |                                | (10,542 | ) |      |   | (10,275 | )
|                                                                        |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |  |                                |         |   |      |   |         |  
|Purchase of property and equipment                                      |  |                                | (472    | ) |      |   | (277    | )
|Proceeds from sale of property and equipment                            |  |                                | 44      |   |      |   | 1       |  
|Purchase of short-term investments                                      |  |                                | (81,197 | ) |      |   | (60,688 | )
|Proceeds from sales and maturities of short-term investments            |  |                                | 87,728  |   |      |   | 67,178  |  
|Acquisition of Xtend                                                    |  |                                | (529    | ) |      |   |         |  
|                                                                        |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                               |  |                                | 5,574   |   |      |   | 6,214   |  
|                                                                        |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES-                                   |  |                                |         |   |      |   |         |  
|Issuance of common stock                                                |  |                                | 1,090   |   |      |   | 163     |  
|                                                                        |  |                                |         |   |      |   |         |  
|Decrease in cash and cash equivalents                                   |  |                                | (3,878  | ) |      |   | (3,898  | )
|Cash and cash equivalents at beginning of period                        |  |                                | 12,930  |   |      |   | 15,071  |  
|                                                                        |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                              |  | $                              | 9,052   |   |      | $ | 11,173  |  
|                                                                        |  |                                |         |   |      |   |         |  



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



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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



The accompanying unaudited condensed consolidated financial statements of Vyyo Inc. have been prepared in accordance with generally
accepted accounting principles (GAAP) 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 GAAP 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, 2003, included in the annual report on Form 10-K for the year
ended December 31, 2003, filed with the Securities and Exchange Commission.



Organization and Principles of Consolidation



The consolidated financial statements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries (collectively, Vyyo
or the Company). Following the acquisition of all of the outstanding shares of Xtend Networks Ltd. (Xtend) on June 30, 2004, the results of Xtends operations were consolidated commencing July 1, 2004.



Vyyo operates in the Fixed Broadband Wireless
segment. The Fixed Broadband Wireless segment supplies broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed data and voice connections to business and residential subscribers. The Company
sells these systems directly to service providers, as well as to system integrators that deploy the Companys systems as part of their end-to-end network solutions for service providers.



On June 30, 2004, the Company acquired all of the
outstanding shares of Xtend, an Israeli privately-held company which is a development stage enterprise. Xtend provides infrastructure solutions that expand the bandwidth of cable television lines (see note 3). This acquisition adds a new business
segment to the Companys operations  the Cable segment.



On August 12, 2003, the Companys Board of Directors determined to cease its software business operated by Shira Computers Ltd.
(Shira), a wholly-owned subsidiary of the Company, and terminate all of Shiras employees. Prior to the cessation of operations, Shira operated in the Software Products segment. The cessation of Shiras operations
represents a disposal of a business segment under Statement of Financial Accounting Standards (SFAS) No. 144 (Accounting for the Impairment or Disposal of Long-Lived Assets). Accordingly, the results of the software segment
have been classified as discontinued operations, and prior periods have been reclassified respectively (see also note 4).



Accounting Principles



The consolidated financial statements have been prepared in accordance with GAAP in the United States.



Use of Estimates



The preparation of the financial statements in conformity
with GAAP 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



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Use of Estimates (continued)



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
either 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 wrote down excess inventory and purchase commitments of $8.45 million. The write-down was charged to the
cost of revenues. In the nine months ended September 30, 2004, inventory that was previously written-down to $0 by taking a charge of $435,000 was sold for the amount of $1,014,000. In the three months ended September 30, 2004, none of this
written-down inventory was sold. In the three and nine months ended September 30, 2003, inventory that was previously written-down to $0 by taking a charge of $588,000 and $1,335,000 was sold for the amount of $897,000 and $2,522,000, respectively.



Intangible Assets



The Companys definite-life intangible assets relate to
the acquisition of Xtend and consist of technology, non-competition agreements, an exclusive sales agreement and workforce. These assets are amortized using the straight-line method over their estimated useful lives, ranging between one and six
years.



Impairment of Long-Lived Assets



SFAS 144 requires that long-lived assets including certain
intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash
flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values.



The Company performed an impairment test, based on
Shiras intangible assets, property and equipment as of June 30, 2003. The impairment test resulted in impairment charges of $2,224,000 (see note 4(b)).



Goodwill



The Companys goodwill was allocated to the Software Products segment, which was classified as discontinued operations.



As described in note 4(b) below, the Company performed a
goodwill impairment test, based on Shiras valuation as of June 30, 2003, by utilizing the expected future discounted cash flows to determine the fair value of the Software Products segment. The impairment test resulted in an impairment charge
of $420,000, which was the remaining balance of Shiras goodwill as of June 30, 2003.



Reclassifications



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



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Revenue Recognition



Revenues from the Fixed Broadband Wireless segment are
derived from sales of products. The Company currently provides no services. These products consist of hubs and modems, which are off-the-shelf products, sold as is, without further adjustment or installation. These products are usually
sold individually according to a standard fixed price determined by the Company. When establishing a relationship with a new customer, the Company may also sell these products together as a package, in which case these products are
shipped at the same time to the customer. As the Companys products are off-the-shelf products, the Company does not provide its customers with the right of return or any additional services after delivery (except for standard product
warranty).



Revenues from the Companys
products are recorded when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and customer acceptance requirements have been met; (3) the price is fixed or determinable; and (4) collection of payment is reasonably assured
and the Company has no additional obligations.



Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables addresses the accounting, by a vendor, for contractual arrangements in which multiple revenue-generating activities will
be performed by the vendor. It is effective prospectively for all arrangements entered into in fiscal periods beginning after June 15, 2003.



EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of
accounting. The Companys multiple deliverables arrangements are those arrangements with new customers in which the Companys products are sold together as a package. Because these off-the-shelf products are delivered at the
same time and the four revenue recognition criteria are met at that time, the adoption of EITF 00-21 had no impact on the Companys financial position and results of operations.



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



Loss per Share



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



Employee Stock-Based Compensation



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



Under Fixed Plan accounting,
compensation cost is fixed, measured at grant date and is not subsequently adjusted. Under Variable Plan accounting, the measurement date is after the grant date and compensation cost is estimated and recorded each period from the date
of grant to the measurement date, based on the difference between the option price and the fair market value of the stock at the end of each period.



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Employee Stock Based Compensation (continued)



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



Pro forma information regarding loss and loss per share required under SFAS No. 123 has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS No. 123. The pro forma loss per share below reflects both (i) the charge for stock included in the historical loss and (ii) the expense allocation based on the SFAS No. 123 calculation. The
fair value for stock options was estimated at the date of each option grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and nine months ended September 30, 2004 and 2003: risk-free
interest rates ranging from 1.09% to 4.62%; dividend yields of zero; a weighted-average expected life of the options of approximately 3.9 and 4.05 years; and volatility ranging from 0.36 to 1.21.



The Companys pro forma information reflecting stock-based compensation
is as follows:



|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ------ | - | ------------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                   |  | Three Months endedSeptember 30,      |        |   | Nine Months endedSeptember 30,       |  
|                                                                                                                   |  | 2004                                 |        |   | 2003                                 |   |        | 2004 |  |   | 2003    |  
|                                                                                                                   |  | In thousands (except per share data) |        |   | In thousands (except per share data) |  
|Loss from continuing operations as reported                                                                        |  | $                                    | (6,671 | ) |                                      | $ | (1,316 | )    |  | $ | (12,582 | ) |  | $ | (5,074  | )
|Deduct (add): stock based employee compensation expense (income), included in reported loss                        |  |                                      | 57     |   |                                      |   | 136    |      |  |   | (428    | ) |  |   | 136     |  
|Add: stock based employee compensation expenses determined under fair value method for all awards                  |  |                                      | (1,293 | ) |                                      |   | (538   | )    |  |   | (3,065  | ) |  |   | (789    | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Pro forma loss from continuing operations                                                                          |  | $                                    | (7,907 | ) |                                      |   | (1,718 | )    |  | $ | (16,075 | ) |  |   | (5,727  | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from discontinued operations as reported                                                             |  | $                                    | 61     |   |                                      | $ | (1,276 | )    |  | $ | 11      |   |  |   | (6,921  | )
|Add (deduct): stock based employee compensation income (expense) determined under fair value method for all awards |  |                                      |        |   |                                      |   | 1      |      |  |   | 7       |   |  |   | (13     | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Pro forma income (loss) from discontinued operations                                                               |  |                                      | 61     |   |                                      |   | (1,275 | )    |  |   | 18      |   |  |   | (6,934  | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Pro forma loss                                                                                                     |  | $                                    | (7,846 | ) |                                      | $ | (2,993 | )    |  | $ | (16,057 | ) |  | $ | (12,661 | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share:                                                                                  |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|As reported:                                                                                                       |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Continuing operations                                                                                              |  | $                                    | (0.45  | ) |                                      | $ | (0.10  | )    |  | $ | (0.92   | ) |  | $ | (0.40   | )
|Discontinued operations                                                                                            |  |                                      | 0.00   |   |                                      |   | (0.10  | )    |  |   | 0.00    |   |  |   | (0.55   | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                                   |  | $                                    | (0.45  | ) |                                      | $ | (0.20  | )    |  | $ | (0.92   | ) |  | $ | (0.95   | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Pro forma:                                                                                                         |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|Continuing operations                                                                                              |  | $                                    | (0.53  | ) |                                      | $ | (0.14  | )    |  | $ | (1.18   | ) |  | $ | (0.45   | )
|Discontinued operations                                                                                            |  |                                      | 0.00   |   |                                      |   | (0.10  | )    |  |   | 0.00    |   |  |   | (0.55   | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                                   |  | $                                    | (0.53  | ) |                                      | $ | (0.24  | )    |  | $ | (1.18   | ) |  | $ | (1.00   | )
|                                                                                                                   |  |                                      |        |   |                                      |   |        |      |  |   |         |   |  |   |         |  



9



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



|2. | Inventory
|-- | ---------



Inventory is comprised of the following:



|                |  |                   |       |                  |   |      
|--------------- |  | ----------------- | ----- | ---------------- | - | -----
|                |  | September 30,2004 |       | December 31,2003
|                |  | In thousands     
|Raw materials   |  | $                 | 1,274 |                  | $ | 366  
|Work in process |  |                   | 873   |                  |   | 519  
|Finished goods  |  |                   | 749   |                  |   | 307  
|                |  |                   |       |                  |   |      
|                |  | $                 | 2,896 |                  | $ | 1,192
|                |  |                   |       |                  |   |      



|3. | Acquisition of Xtend
|-- | --------------------



On June 30, 2004, the Company acquired all of the outstanding shares of Xtend (the Transaction), an Israeli privately-held
company which is a development stage enterprise. Xtend provides infrastructure solutions that expand the bandwidth of cable television lines. The Transaction allows the Company to diversify its business by adding a different field of operation to
its fixed broadband wireless business. The results of Xtends operations were consolidated with the Companys operations commencing July 1, 2004.



In connection with the Transaction:



(1) The Company issued 1,398,777 shares of the Companys common stock and agreed to make cash payments of approximately $2,970,000
for non-competition agreements from certain employees of Xtend;



(2) The Company provided a contingent promissory note (Contingent Note) in the principal amount of $6.5 million payable on March 31, 2007. In the event that the consolidated revenues of the Company in the
year ended December 31, 2006 equal or exceed $60 million and the consolidated gross margin of the Company equals or exceeds 35% during the same period, the Contingent Note shall be canceled. The Contingent Note is subject to acceleration in the
event that the excess sum of the Companys cash, cash equivalents, short term investments and accounts receivables, net of the sum of the Companys long-term and short-term liabilities (exclusive of the Contingent Note) is less than $20
million on December 31, 2005 or on June 30, 2006;



(3) The Company agreed to pay a contingent cash bonus to an Xtend employee in the amount of approximately $1.2 million and granted the same employee 146,000 restricted shares, of which 71,000 shares vest over a six month period and 75,000
shares vest subject to designated performance criteria. The contingent cash bonus was resolved and a provision was recorded in the three months ended September 30, 2004;



(4) The Company agreed to make cash payments to certain other Xtend option holders and Xtend employees in
connection with those parties outstanding options in Xtend. These cash payments include a payment of approximately $269,000 paid in cash at the closing of the Transaction on June 30, 2004 and a payment of approximately $255,000 which is
expected to be paid over two years upon realization of certain conditions;



(5) The Company committed to contribute to Xtend up to $10 million, to be contributed in stages based on the operational needs of Xtend; and



(6) The Company incurred direct expenses related to the Transaction amounting to $818,000.



10



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



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



As Xtend is a development stage enterprise that has not yet commenced its planned principal operations, the Company accounted for the
Transaction as an acquisition of net assets.



The purchase price consisted of:



|                                                    |  |               |       
|--------------------------------------------------- |  | ------------- | ------
|                                                    |  | June 30, 2004
|                                                    |  | In thousands 
|Value of Vyyos shares *                            |  | $             | 8,492 
|Non-competition cash payments                       |  |               | 2,970 
|Other cash payments to option holders and employees |  |               | 269   
|Acquisition direct costs                            |  |               | 818   
|                                                    |  |               |       
|Total purchase price                                |  | $             | 12,549
|                                                    |  |               |       

---

|* | This valuation was based on the Companys average share price of $6.07, based on the average closing prices from May 13, 2004 to May 19, 2004 and including two trading days
prior to and two trading days subsequent to the public announcement of the Transaction.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The tangible and intangible net assets acquired consisted of the following (in thousands):



|                                                   |  |   |        |  
|-------------------------------------------------- |  | - | ------ | -
|Tangible assets acquired:                          |  |   |        |  
|Cash and cash equivalents                          |  | $ | 3,191  |  
|Other current assets                               |  |   | 481    |  
|Property and equipment, net                        |  |   | 325    |  
|Current liabilities                                |  |   | (937   | )
|                                                   |  |   |        |  
|Total tangible assets acquired:                    |  | $ | 3,060  |  
|                                                   |  |   |        |  
|Intangible assets acquired:                        |  |   |        |  
|Existing technology                                |  |   | 2,328  |  
|In-process research and development                |  |   | 1,402  |  
|Non-competition agreements                         |  |   | 2,941  |  
|Exclusive sales agreement                          |  |   | 2,570  |  
|Workforce                                          |  |   | 248    |  
|                                                   |  |   |        |  
|Total intangible assets acquired:                  |  |   | 9,489  |  
|                                                   |  |   |        |  
|Total tangible and intangible net assets acquired: |  | $ | 12,549 |  
|                                                   |  |   |        |  



The
fair value of the intangible assets acquired was estimated by a third party appraiser, based upon future expected discounted cash-flows.



11



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



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



The amount allocated to research and development in-process represents the fair value of purchased in-process technology for research
projects that, as of the acquisition date, have not reached technological feasibility and have no alternative future use. Accordingly, they were charged to the statement of operations on the date of acquisition.



Intangible assets acquired are amortized using the
straight-line method over their estimated useful lives as follows: existing technology over six years; non-competition agreements over approximately three years; an exclusive sales agreement over four and one half years and workforce over one year.



Amortization of intangible assets acquired
for the three and nine months ended September 30, 2004 was $522,000, consisting of the amortization of existing technology of $97,000, non-competition agreements amounting to $221,000, an exclusive sales agreement amounting to $142,000 and workforce
amounting to $62,000.



Estimated future
amortization expenses are as follows:



|     |  |              |      
|---- |  | ------------ | -----
|     |  | In thousands
|2004 |  | $            | 523  
|2005 |  |              | 1,966
|2006 |  |              | 1,842
|2007 |  |              | 1,693
|2008 |  |              | 959  
|2009 |  |              | 388  
|2010 |  |              | 194  
|     |  |              |      
|     |  | $            | 7,565
|     |  |              |      



|4. | Shira  Discontinued Operations
|-- | -------------------------------



(a) Assets and liabilities of the discontinued operation are as follows:



|                    |  |                   |     |                  |   |    
|------------------- |  | ----------------- | --- | ---------------- | - | ---
|                    |  | September 30,2004 |     | December 31,2003
|                    |  | In thousands     
|Current assets      |  | $                 | 25  |                  | $ | 40 
|                    |  |                   |     |                  |   |    
|Current liabilities |  | $                 | 439 |                  | $ | 632
|                    |  |                   |     |                  |   |    



12



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



|4. | Shira - Discontinued Operations (continued)
|-- | -------------------------------------------



Profit and loss of the discontinued operations were as follows:



|                                           |  |                                  |    |      |                                 |        |      |  |      |    |  |   |        |  
|------------------------------------------ |  | -------------------------------- | -- | ---- | ------------------------------- | ------ | ---- |  | ---- | -- |  | - | ------ | -
|                                           |  | Three Months Ended September 30, |    |      | Nine Months Ended September 30, |       
|                                           |  | 2004                             |    | 2003 |                                 |        | 2004 |  | 2003 |   
|                                           |  | In thousands                     |   
|Revenues                                   |  | $                                | 7  |      | $                               | 80     |      |  | $    | 99 |  | $ | 307    |  
|Cost of revenues                           |  |                                  |    |      |                                 | 28     |      |  |      | 27 |  |   | 590    |  
|                                           |  |                                  |    |      |                                 |        |      |  |      |    |  |   |        |  
|Gross profit (loss)                        |  | $                                | 7  |      | $                               | 52     |      |  | $    | 72 |  | $ | (283   | )
|                                           |  |                                  |    |      |                                 |        |      |  |      |    |  |   |        |  
|Income (loss) from operations              |  | $                                | 61 |      | $                               | (1,273 | )    |  | $    | 8  |  | $ | (6,907 | )
|Interest (expenses) income, net            |  |                                  |    |      |                                 | (3     | )    |  |      | 3  |  |   | (14    | )
|                                           |  |                                  |    |      |                                 |        |      |  |      |    |  |   |        |  
|Income (loss) from discontinued operations |  | $                                | 61 |      | $                               | (1,276 | )    |  | $    | 11 |  | $ | (6,921 | )
|                                           |  |                                  |    |      |                                 |        |      |  |      |    |  |   |        |  



Income
(loss) from discontinued operations includes:



| | (1) | The amortization of identifiable assets in the three and nine month periods ending on September 30, 2003 were $0 and $516,000, respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Severance expenses and termination of contractual obligations, accounted for according to SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities),
are as follows:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                       |  |                   |     |   |                                      |   |     |       |  |   |     |  
|---------------------------------------------------------------------- |  | ----------------- | --- | - | ------------------------------------ | - | --- | ----- |  | - | --- | -
|                                                                       |  | Severanceexpenses |     |   | Termination ofcontractualobligations |   |     | Total | 
|                                                                       |  | In thousands      |    
|Balance as of December 31, 2003                                        |  | $                 | 72  |   |                                      | $ | 10  |       |  | $ | 82  |  
|Incurred expenses paid during the nine months ended September 30, 2004 |  |                   | (72 | ) |                                      |   | (10 | )     |  |   | (82 | )
|                                                                       |  |                   |     |   |                                      |   |     |       |  |   |     |  
|Balance as of September 30, 2004                                       |  | $                 |    |   |                                      | $ |    |       |  | $ |    |  
|                                                                       |  |                   |     |   |                                      |   |     |       |  |   |     |  



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



13



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



|5. | Accrued Liabilities
|-- | -------------------



Accrued liabilities consist of the following:



|                          |  |                   |       |                  |   |      
|------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                          |  | September 30,2004 |       | December 31,2003
|                          |  | In thousands     
|Withholding tax           |  | $                 | 1,933 |                  | $ | 1,727
|Compensation and benefits |  |                   | 3,545 |                  |   | 1,598
|Royalties                 |  |                   | 1,019 |                  |   | 1,016
|Warranty *                |  |                   | 553   |                  |   | 389  
|Other                     |  |                   | 1,150 |                  |   | 1,056
|                          |  |                   |       |                  |   |      
|                          |  | $                 | 8,200 |                  | $ | 5,786
|                          |  |                   |       |                  |   |      

---

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



|                                                         |  |                                    |      |   |                            |   |      |  
|-------------------------------------------------------- |  | ---------------------------------- | ---- | - | -------------------------- | - | ---- | -
|                                                         |  | Nine Months endedSeptember 30,2004 |      |   | Year endedDecember 31,2003 |  
|                                                         |  | In thousands                       |     
|Balance at beginning of period                           |  | $                                  | 389  |   |                            | $ | 395  |  
|Payments made under the warranty                         |  |                                    |      |   |                            |   | (58  | )
|Product warranty issued for new sales                    |  |                                    | 349  |   |                            |   | 444  |  
|Changes in accrual in respect of warranty periods ending |  |                                    | (185 | ) |                            |   | (392 | )
|                                                         |  |                                    |      |   |                            |   |      |  
|Balance at end of period                                 |  | $                                  | 553  |   |                            | $ | 389  |  
|                                                         |  |                                    |      |   |                            |   |      |  



|6. | Severance Liabilities
|-- | ---------------------



The amounts paid related to severance and severance expenses were:



|                                  |  |                                 |     |                                |   |      |  |      |     |  |   |    
|--------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                  |  | Three Months endedSeptember 30, |     | Nine Months endedSeptember 30,
|                                  |  | 2004                            |     | 2003                           |   | 2004 |  | 2003
|                                  |  | In thousands                    |     | In thousands                  
|Amounts paid related to severance |  | $                               | 92  |                                | $ | 60   |  | $    | 375 |  | $ | 610
|                                  |  |                                 |     |                                |   |      |  |      |     |  |   |    
|Severance expenses*               |  | $                               | 131 |                                | $ | 81   |  | $    | 410 |  | $ | 642
|                                  |  |                                 |     |                                |   |      |  |      |     |  |   |    

---

|* | Severance expenses relating to Shira and presented under discontinued operations were $12,000 and $450,000, respectively, in the three and nine month periods ending September 30,
2003.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company is obligated
to make a contribution, in respect of the Companys Israeli severance pay obligations, of $139,000 for the period beginning October 1, 2004 and ending December 31, 2004.



14



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



|7. | Contingency
|-- | -----------



In connection with a contingent promissory note of $6,500,000 related to the Xtend Transaction, see note 3.



|8. | Former Chief Executive Officer (Former CEO) separation agreement
|-- | ------------------------------------------------------------------



In April 2002, pursuant to a separation agreement entered into in October 2001 and as part of a
restructuring program that the Company implemented in 2001, the Companys former Chief Executive Officer drew down on the $1 million loan provided for in the separation agreement. This loan is due on January 1, 2006, or earlier upon sales of
the Companys shares held by such officer or upon certain other circumstances. The loan is secured solely by the 266,667 options held by such officer and the shares of the Companys common stock underlying these options.



Combined accounting is being applied to the 266,667 options
issued and the related $1 million loan secured by such options. This results in variable accounting for the 266,667 options, with a minimum expense being recorded of $1 million. The total positive adjustments for the three and nine months ended
September 30, 2004 associated with these options were $243,000 and $792,000, respectively, recorded as restructuring adjustments. Restructuring charges associated with these options were $136,000 for the three and nine months ended September 30,
2003.



|9. | Comprehensive Loss
|-- | ------------------



The components of comprehensive loss are as follows:



|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Three Months endedSeptember 30, |        |   | Nine Months endedSeptember 30, |  
|                                                        |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|                                                        |  | In thousands                    |        |   | In thousands                   |  
|Loss                                                    |  | $                               | (6,610 | ) |                                | $ | (2,592 | )    |  | $ | (12,571 | ) |  | $ | (11,995 | )
|Unrealized gain (loss) on available-for-sale securities |  |                                 | 131    |   |                                |   | (118   | )    |  |   | (82     | ) |  |   | (318    | )
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                      |  | $                               | (6,479 | ) |                                | $ | (2,710 | )    |  | $ | (12,653 | ) |  | $ | (12,313 | )
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



15



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



|10. | Segment Reporting
|--- | -----------------



Following the acquisition of Xtend, as described in note 3 above, the Companys business is divided into two segments: Fixed
Broadband Wireless and Cable. The results of Xtends operations were consolidated commencing July 1, 2004.



|                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|                                                                |  | In thousands                    |       
|Consolidated revenues from the Fixed Broadband Wireless segment |  | $                               | 913    |   |                                | $ | 2,223  |      |  | $ | 5,524   |   |  | $ | 4,355  |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Loss from continuing operations:                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Fixed broadband wireless                                        |  | $                               | (3,241 | ) |                                | $ | (1,645 | )    |  | $ | (8,107  | ) |  | $ | (6,192 | )
|Cable                                                           |  |                                 | (3,547 | ) |                                |   |        |      |  |   | (4,949  | ) |  |   |        |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Consolidated operating loss from continuing operations          |  | $                               | (6,788 | ) |                                | $ | (1,645 | )    |  | $ | (13,056 | ) |  | $ | (6,192 | )
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  



|                         |  |                   |        |                  |   |       
|------------------------ |  | ----------------- | ------ | ---------------- | - | ------
|                         |  | September 30,2004 |        | December 31,2003
|                         |  | In thousands     
|Identifiable assets:     |  |                   |        |                  |   |       
|Fixed Broadband Wireless |  | $                 | 52,403 |                  | $ | 61,805
|Cable                    |  |                   | 9,278  |                  |   |       
|                         |  |                   |        |                  |   |       
|                         |  | $                 | 61,681 |                  | $ | 61,805
|                         |  |                   |        |                  |   |       



| | Sales | to major customers:
| | ----- | -------------------



|           |  |                                 |   |  |                                |   |  |      |   |  |      |  
|---------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|           |  | Three Months endedSeptember 30, |   |  | Nine Months endedSeptember 30, |  
|           |  | 2004                            |   |  | 2003                           |   |  | 2004 |   |  | 2003 |  
|Customer A |  | 54                              | % |  |                                |   |  | 21   | % |  |      |  
|Customer B |  | 32                              | % |  | 10                             | % |  | 18   | % |  | 12   | %
|Customer C |  | 10                              | % |  |                                |   |  | 2    | % |  |      |  
|Customer D |  |                                 |   |  |                                |   |  | 23   | % |  |      |  
|Customer E |  |                                 |   |  | 53                             | % |  | 14   | % |  | 60   | %
|Customer F |  |                                 |   |  | 9                              | % |  | 8    | % |  | 5    | %
|Customer G |  |                                 |   |  |                                |   |  | 7    | % |  |      |  
|Customer H |  |                                 |   |  | 22                             | % |  |      |   |  | 14   | %



16



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



|11. | Subsequent events
|--- | -----------------



| | a. | On November 1, 2004, the Company entered into an employment agreement (the Agreement) with a new Chief Executive Officer (CEO) of Xtend. Under the terms of
the Agreement, the CEO was granted stock options to purchase 300,000 shares of the Companys common stock. Subject to the approval of the Companys Board of Directors, the CEO will be awarded another grant in 2005 to purchase 400,000
shares of the Companys common stock. Both of the stock option grants vest 25% at the CEOs one year employment anniversary and monthly thereafter over three additional years, as long as the CEO continues as an employee of or consultant to
the Company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | On November 4, 2004, two Israeli subsidiaries of the Company entered into new lease agreements with Kiryat Sede Hateufa Ltd. for certain premises (the Premises) in the
Modiin District of Israel, near Tel-Aviv (the Lease). The Premises includes approximately 3,850 square meters (approximately 42,000 square feet) of office space. The term of each Lease begins on March 31, 2005 and continues for six
years. Rent and other fees required of the subsidiaries are set at approximately $60,795 per month.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



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##### Table of Contents

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



This Managements Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information
presented, may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Vyyos actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including, without limitation, those set forth under the heading Risk Factors following this Managements Discussion and Analysis section, and elsewhere in this
report.



Overview



We supply end-to-end broadband access solutions used by telecommunications
providers to deliver both circuit-switched services, such as telephony and E-1 connections, and Internet Protocol (IP) services, such as high-speed data and voice over IP connections, to business and residential subscribers. Our
technology uses point-to-multipoint architecture to deliver services over wireless media or cable television networks. We sell our systems to system integrators, distributors and directly to service providers.



In 2001, the global telecommunications market, and in particular the fixed
wireless broadband access market, experienced a significant downturn. We experienced dramatic decreases in the sales of our products and the adoption of our technology in 2001, and our sales continued at a reduced level through 2003. While we expect
that the telecommunications market may recover over time, any such recovery may occur only slowly. If the market does not recover in the near future and if our sales do not substantially increase from current levels, we will continue to incur
losses, and may never achieve profitability. We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. We incurred losses of approximately $12.6 million for the nine months ended
September 30, 2004. As of September 30, 2004, our accumulated deficit was approximately $187.9 million.



In 2003, particularly in the later months of the year, it appeared as though the telecommunications and wireless communications industries were beginning
to recover in connection with some positive announcements by major telecommunications service providers, increased capital spending by cellular operators and the growing economy in China. Starting in 2003, we believed new opportunities might develop
for our products and began to dedicate additional resources to sales in international markets, particularly China. We continued to expand our efforts in new markets in the first nine months of 2004. These opportunities, however, are developing
slowly and the pricing environment is very competitive.



In
addition to further developing our traditional wireless business, we also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. We have invested, and we expect that we
will continue to invest, significant time and resources searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.



On June 30, 2004, we completed the acquisition of all of the outstanding
shares of Xtend (the Transaction). Xtend provides infrastructure solutions that expand the bandwidth of cable television lines. Xtend is based in Tel Aviv, Israel and has an office in Atlanta, Georgia. Xtend employed 32 individuals
worldwide as of September 30, 2004. Xtend has never been profitable and, as it is in a development stage, to date it has not generated any revenues. The results of Xtends operations were consolidated with Vyyos operations commencing July
1, 2004.



The acquisition of Xtend, which is currently
operating as a wholly-owned subsidiary of Xtend Cable Solutions Inc., a wholly-owned subsidiary of Vyyo Inc., is intended to diversify our business and to seek to open new markets for our current products. In May of 2004, we announced that we would
leverage Vyyos Data Over Cable System Interface Specification (DOCSIS)-based wireless hub to enable cable companies to offer T1 circuit-switched products.



18



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##### Table of Contents

In connection with the Transaction:



(1) Vyyo issued 1,398,777 shares of Vyyo Inc.s common stock and agreed to make cash payments of approximately
$2,970,000 for non-competition agreements from certain employees of Xtend;



(2) Vyyo provided a contingent promissory note (Contingent Note) in a principal amount of $6.5 million payable on March 31, 2007. In the event that the consolidated revenues of Vyyo in the year ended
December 31, 2006 equal or exceed $60 million and the consolidated gross margin of Vyyo equals or exceeds 35% during the same period, the Contingent Note shall be canceled. The Contingent Note is subject to acceleration in the event that the excess
sum of the Companys cash, cash equivalents, short term investments and accounts receivables, net of the sum of the Companys long-term and short-term liabilities (exclusive of the Contingent Note) is less than $20 million on December 31,
2005 or on June 30, 2006;



(3) Vyyo agreed to pay a contingent
cash bonus to a certain Xtend employee in the amount of approximately $1.2 million and granted the same employee 146,000 restricted shares, out of which 71,000 shares vest over a six months period and 75,000 shares would vest subject to designated
performance criteria. The contingent cash bonus was resolved and a provision was recorded in the three months ended September 30, 2004;



(4) Vyyo agreed to make cash payments to certain other Xtend option holders and Xtend employees in connection with those parties outstanding options
in Xtend. These cash payments include a payment of approximately $269,000 paid in cash at the closing of the Transaction on June 30, 2004 and a payment of approximately $255,000 which is expected to be paid over two years upon realization of certain
conditions;



(5) Vyyo committed to contribute to Xtend up to
$10 million, to be contributed in stages based on the operational needs of Xtend; and



(6) Vyyo incurred direct expenses related to the Transaction amounting to $818,000.



As Xtend is a development stage enterprise that has not yet commenced its planned principal operations, we accounted for the Transaction as an acquisition
of net assets.



The purchase price consisted of:



|                                                    |  |               |       
|--------------------------------------------------- |  | ------------- | ------
|                                                    |  | June 30, 2004
|                                                    |  | In thousands 
|Value of Vyyos shares *                            |  | $             | 8,492 
|Non-competition cash payments                       |  |               | 2,970 
|Other cash payments to option holders and employees |  |               | 269   
|Acquisition direct costs                            |  |               | 818   
|                                                    |  |               |       
|Total purchase price                                |  | $             | 12,549
|                                                    |  |               |       

---

|* | This valuation was based on Vyyos average share price of $6.07, based on the average closing prices from May 13, 2004 to May 19, 2004 and including two trading days prior to
and two trading days subsequent to the public announcement of the Transaction.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



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##### Table of Contents

The tangible and intangible net assets acquired consisted of the following (in thousands):



|                                                   |  |   |        |  
|-------------------------------------------------- |  | - | ------ | -
|Tangible assets acquired:                          |  |   |        |  
|Cash and cash equivalents                          |  | $ | 3,191  |  
|Other current assets                               |  |   | 481    |  
|Property and equipment, net                        |  |   | 325    |  
|Current liabilities                                |  |   | (937   | )
|                                                   |  |   |        |  
|Total tangible assets acquired:                    |  | $ | 3,060  |  
|                                                   |  |   |        |  
|Intangible assets acquired:                        |  |   |        |  
|Existing technology                                |  |   | 2,328  |  
|In-process research and development                |  |   | 1,402  |  
|Non-competition agreements                         |  |   | 2,941  |  
|Exclusive sales agreement                          |  |   | 2,570  |  
|Workforce                                          |  |   | 248    |  
|                                                   |  |   |        |  
|Total intangible assets acquired:                  |  |   | 9,489  |  
|                                                   |  |   |        |  
|Total tangible and intangible net assets acquired: |  | $ | 12,549 |  
|                                                   |  |   |        |  

|
|



The fair
value of the intangible assets acquired was estimated by a third party appraiser, based upon future expected discounted cash-flows.



The amount allocated to research and development in-process represents the fair value of purchased in-process technology for research projects that, as of
the acquisition date, have not reached technological feasibility and have no alternative future use. Accordingly, they were charged to the statement of operations on the date of acquisition.



Intangible assets acquired are amortized using the straight-line method over
their estimated useful lives as follows: existing technology over six years; non-competition agreements over approximately three years; exclusive sales agreement over four and one half years and workforce over one year.



Amortization of intangible assets acquired for the three and nine months
ended September 30, 2004 was $522,000, consisting of the amortization of existing technology of $97,000, non-competition agreements amounting to $221,000, an exclusive sales agreement amounting to $142,000 and workforce amounting to $62,000.



Estimated future amortization expenses are as follows:



|     |  |              |      
|---- |  | ------------ | -----
|     |  | In thousands
|2004 |  | $            | 523  
|2005 |  |              | 1,966
|2006 |  |              | 1,842
|2007 |  |              | 1,693
|2008 |  |              | 959  
|2009 |  |              | 388  
|2010 |  |              | 194  
|     |  |              |      
|     |  | $            | 7,565
|     |  |              |      



20



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##### Table of Contents

Critical Accounting Policies



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



Our significant accounting policies are described in the notes to the
annual consolidated financial statements as of and for the year ended December 31, 2003. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We believe our
most critical accounting policies include the following:



Revenue recognition. Revenues from our Fixed Broadband Wireless segment are derived from sales of products. We currently provide no services. These products consist of hubs and modems, which are off-the-shelf products, sold as
is, without further adjustment or installation. These products are usually sold individually according to a standard fixed price determined by us. When establishing a relationship with a new customer, we may also sell these products together
as a package, in which case these products are shipped at the same time to the customer. As our products are off-the-shelf products, we do not provide our customers with the right of return or any additional services after delivery
(except for standard product warranty).



Revenues from our
products are recorded when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and customer acceptance requirements have been met; (3) the price is fixed or determinable; and (4) collection of payment is reasonably assured
and we have no additional obligations.



Emerging Issues Task
Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables addresses the accounting, by a vendor, for contractual arrangements in which multiple revenue-generating activities will be performed by the vendor. It
is effective prospectively for all arrangements entered into in fiscal periods beginning after June 15, 2003.



EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. Our
multiple deliverables arrangements are those arrangements with new customers in which our products are sold together as a package. Because these off-the-shelf products are delivered at the same time and the four revenue recognition
criteria are met at that time, the adoption of EITF 00-21 had no impact on our financial position and results of operations.



Products warranty. We accrue for product warranty costs upon recognition of product revenues. The provision is calculated as a percentage of the
sales based on historical experience.



Intangible assets.The acquisition of Xtend has generated significant amounts of intangible assets, which consist mainly of technology, non-competition agreements, an exclusive sales agreement and workforce. These definitive-life intangible assets are amortized
using the straight-line method over their estimated periods of useful lives, ranging between one and six years. This valuation of the fair value of these intangible assets acquired was performed by qualified independent appraisers, based on the
estimated expected discounted cash-flows, and will be subject to future impairment tests.



Acquired research and development in-process.Acquired products or projects which have achieved technical feasibility are capitalized as intangible assets, since it is probable that the costs will give rise to
future economic benefits. Acquired products or projects which have not achieved technical feasibility are charged to the statement of operations on the date of acquisition.



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



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##### Table of Contents

Results of Operations



Revenues



Revenues from our Fixed Broadband Wireless segment are derived from sales of products. The company currently provides no services. These products consist
of hubs and modems, which are off-the-shelf products, sold as is, without further adjustment or installation. These products are usually sold individually according to a standard fixed price determined by us. When establishing a
relationship with a new customer, we may also sell these products together as a package, in which case these products are shipped at the same time to the customer. As our products are off-the-shelf products, we do not provide our
customers with the right of return or any additional services after delivery, except for standard product warranty.



Revenues decreased to $913,000 in the third quarter of 2004 from $2.2 million in the third quarter of 2003, and increased to $5.5 million in the first
nine months of 2004 from $4.4 million in the first nine months of 2003. The decrease in revenues in the third quarter of 2004 was due to the decreased shipments of our products as well as lower selling prices as a result of competitive price
pressure. The increase in revenues in the first nine months of 2004 primarily reflects the increased shipments of our products compared to the first nine months of 2003 in the U.S. and Asia markets. Revenues include revenues from sales of inventory
that was previously written down to $0 in 2001 of approximately $0 in the third quarter of 2004, $897,000 in the third quarter of 2003, $1 million in the first nine months of 2004 and $2.5 million in the first nine months of 2003. As a result of the
write-down in 2001, the cost of revenues associated with the sales of this inventory has been accounted for as $0.



Our revenue is concentrated among relatively few customers, as set forth in the following table. 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.



|           |  |                                 |   |  |                                |   |  |      |   |  |      |  
|---------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|           |  | Three Months endedSeptember 30, |   |  | Nine Months endedSeptember 30, |  
|           |  | 2004                            |   |  | 2003                           |   |  | 2004 |   |  | 2003 |  
|Customer A |  | 54                              | % |  |                                |   |  | 21   | % |  |      |  
|Customer B |  | 32                              | % |  | 10                             | % |  | 18   | % |  | 12   | %
|Customer C |  | 10                              | % |  |                                |   |  | 2    | % |  |      |  
|Customer D |  |                                 |   |  |                                |   |  | 23   | % |  |      |  
|Customer E |  |                                 |   |  | 53                             | % |  | 14   | % |  | 60   | %
|Customer F |  |                                 |   |  | 9                              | % |  | 8    | % |  | 5    | %
|Customer G |  |                                 |   |  |                                |   |  | 7    | % |  |      |  
|Customer H |  |                                 |   |  | 22                             | % |  |      |   |  | 14   | %



Cost of Revenues



Cost of revenues consists of component and material costs, direct labor
costs, warranty costs and overhead related to manufacturing our products.



Cost of revenues increased to $1 million in the third quarter of 2004 from $690,000 in the third quarter of 2003, and to $3.2 million in the first nine months of 2004 from $1.2 million in the first nine months of
2003. The increase in cost of revenues in the third quarter and the first nine months of 2004, was primarily attributable to (1) the increase in shipments of our products in the first nine moths of 2004, (2) our increasing workforce, (3) purchases
of new inventories made in response to demand for our products, and (4) expenses related to our efforts to acquire new customers. As a result of the write-down of inventories to $0 in 2001, cost of revenues does not include $0 in the third quarter
of 2004 and $588,000 in the third quarter of 2003, as well as $435,000 in the first nine months of 2004 and $1.3 million in the first nine months of 2003, related to the sale of such inventories. Our gross margin in the third quarter of 2004 and in
the first nine months of 2004 decreased from the gross margin in the third quarter and first nine



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##### Table of Contents

months of 2003 primarily due to (1) competitive price pressure in our markets, (2) increased fixed costs, (3) expenses
related to our efforts to acquire new customers and (4) purchases of new inventories while decreasing the use of the written-down of inventories from 2001. We anticipate that our gross margins will continue to fluctuate and that our cost of revenues
will increase in future periods as and to the extent that we deplete our previously written-down inventories and sell products from newly acquired inventories. At the same time, lower than expected sales in the third quarter of 2004 caused the value
of our inventory to increase by approximately $944,000 from June 30, 2004 to September 30, 2004. While we expect that the telecommunications industry may recover over time, substantial uncertainty exists as to our ability to sell our existing
products if and when the market recovers.



Research and Development Expenses



Research and development expenses consist primarily of
personnel, facilities, equipment and supplies for our research and development activities. Substantially all of our research and development activities are carried out in our facilities in Palo Alto, California, Tel-Aviv, Israel and Jerusalem,
Israel. These expenses are charged to operations as incurred. Our research and development expenses increased to $1.9 million in the third quarter of 2004 from $1.1 million in the third quarter of 2003, and to $4.4 million in the first nine months
of 2004 from $2.8 million in the first nine months of 2003. Research and development expenses included approximately $763,000 from the Cable segment in the third quarter and the first nine months of 2004. The increase in research and development
expenses in the third quarter and in the first nine months of 2004 was due to our research and development efforts for our Cable segment and for new wireless products, as well as an increase in our workforce. In addition, on November 4, 2004, two of
our subsidiaries entered into new leases for approximately 42,000 square feet of office space near Tel-Aviv, Israel, which leases are expected to involve significant rent and fee payments. We anticipate that research and development expenses will
increase in future periods as we increase our efforts to develop new products.



Acquisition of Research and Development in Process



On June 30, 2004, we completed the acquisition of all of the outstanding shares of Xtend. The projects allocated to research and development in-process, amounting to approximately $1.4 million, represent the fair
value of purchased in-process technology for research projects that, as of acquisition date, did not reach technological feasibility and had no alternative future use. Accordingly, they were charged to the statement of operations on the date of
acquisition.



Selling and Marketing



Sales and marketing expenses consist of salaries and related costs of sales
and marketing employees, consulting fees and expenses for travel, trade shows and promotional activities. Sales and marketing expenses increased to $3.2 million in the third quarter of 2004 from $1.1 million in the third quarter of 2003, and to $5.8
million in the first nine months of 2004 from $2.9 million in the first nine months of 2003. The increase in sales and marketing expenses in the third quarter and first nine months of 2004 was due to (1) sales and marketing expenses, including
approximately $2.1 million attributable to the Cable segment in the third quarter and in the first nine months of 2004, of which (a) $1.2 million was related to a relocation bonus to a certain Xtend employee and (b) $299,000 resulted from charges
for stock based compensation, (2) an increase in sales efforts for our wireless products in Asia and other new markets and (3) an increase in our workforce. We anticipate that sales and marketing expenses will increase in future periods as we
increase our efforts to sell our products in the Cable segment and other new markets.



General and Administrative



General and
administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, human resources and legal. General and administrative expenses increased to
$1.3 million in the third quarter of 2004 from $1 million in the third quarter of 2003, and increased to $4.1 million in the first nine months of 2004 from $3.6 million in the first nine months of 2003. The increase in general and
administrative expenses in the first nine months of 2004 was primarily due to (1) increases in salaries and professional fees and (2) the Cable segments general and administrative



23



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##### Table of Contents

expenses, which were included in the third quarter and the first nine months of 2004 and amounted to $171,000. The
general and administrative expenses for the third quarter were partially offset by a positive adjustment for stock based compensation of $162,000.



In the first nine months of 2004, the total amounts that were paid in connection with several charters of an aircraft for business were $498,000, of which
$275,000 were included in the general and administrative expenses and $223,000 were allocated to the Transaction. These amounts were paid to an unaffiliated third party management company in connection with several charters of an aircraft for
business travel purposes. While we chartered the aircraft directly from the management company, the chartered aircraft is leased by Harmony Management, Inc., of which Davidi Gilo and a trust for his benefit are the sole shareholders. Payments made
by us to the management company for the aircraft charters were ultimately paid to Harmony Management, after deductions for certain operating costs and charter management fees. Harmony Management has advised us that the hourly rate charged by the
management company for these charters was substantially less than the standard rate charged for similar charters to other unaffiliated parties.



Amortization of Intangible Assets



Intangible assets acquired are amortized using the straight-line method over their estimated useful lives as follows: existing technology in the
Transaction over six years; non-competition agreements over approximately three years; exclusive sales agreement over four and one-half years and workforce over one year.



Amortization of intangible assets acquired for the three and nine months ended September 30, 2004 was $522,000, consisting
of the amortization of existing technology of $97,000, non-competition agreements amounting to $221,000, an exclusive sales agreement amounting to $142,000 and workforce amounting to $62,000.



Restructuring Charges



In 2001, we implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in
the telecommunications sector and the general economy. In connection with the restructuring program, we recorded a restructuring income in the third quarter of 2004 of $243,000 and in the first nine months of 2004 of $792,000, from a positive
adjustment with respect to a variable compensation plan related to our former Chief Executive Officer.



Interest Income, Net



Interest income, net, includes interest and investment income, foreign currency remeasurement gains and losses. Net interest income was $117,000 in the third quarter of 2004 and $329,000 in the third quarter of 2003. Net interest income was
$474,000 in the first nine months of 2004 and $1.1 million in the first nine months of 2003. Our interest income is derived mainly from our cash and short-term investment balances from proceeds from our initial and follow-on public offerings
effected in 2000. We expect that our interest income will continue to decrease due to decreasing cash balances and low interest rates in financial markets.



Income Taxes



As of December 31, 2003, we had approximately $73 million of Israeli net operating loss carryforwards from our Israeli subsidiaries, $13.7 million of
United States federal net operating loss carryforwards, and $8.1 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 2023. The state net operating loss carryforwards expire in various amounts between
the years 2004 and 2008. 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.



24



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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. Deferred stock compensation is amortized
over the vesting period of the underlying options. Net expenses related to stock compensation of $57,000 in the third quarter of 2004 and net income related to stock compensation of $428,000 in the first nine months of 2004 resulted from (1) a
separation agreement (including income adjustments of $243,000 in the third quarter of 2004 and $792,000 in the first nine months of 2004 associated with a separation agreement with our former Chief Executive Officer recorded as a restructuring
adjustment), (2) an option grant agreement treated as a variable accounting plan, (3) a restricted stock grant and (4) option grants to service providers accounted at a fair value based method.



Discontinued Operation



|(a) | Due to the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market, Vyyos Board of Directors determined on August 12,
2003, to cease all of Shiras business operations and terminate all of Shiras employees. The cessation of Shiras operations represents a disposal of a business segment under SFAS 144. Accordingly, the results of the Software
Products segment have been classified as discontinued operations, and prior periods have been reclassified respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Assets and liabilities of the discontinued operation were as follows:



|                    |  |                   |     |                  |   |    
|------------------- |  | ----------------- | --- | ---------------- | - | ---
|                    |  | September 30,2004 |     | December 31,2003
|                    |  | In thousands     
|Current assets      |  | $                 | 25  |                  | $ | 40 
|                    |  |                   |     |                  |   |    
|Current liabilities |  | $                 | 439 |                  | $ | 632
|                    |  |                   |     |                  |   |    



Profit and loss of the
discontinued operations were as follows:



|                                           |  |                                 |    |      |                                |        |      |  |      |    |  |   |        |  
|------------------------------------------ |  | ------------------------------- | -- | ---- | ------------------------------ | ------ | ---- |  | ---- | -- |  | - | ------ | -
|                                           |  | Three Months EndedSeptember 30, |    |      | Nine Months EndedSeptember 30, |       
|                                           |  | 2004                            |    | 2003 |                                |        | 2004 |  | 2003 |   
|                                           |  | In thousands                    |   
|Revenues                                   |  | $                               | 7  |      | $                              | 80     |      |  | $    | 99 |  | $ | 307    |  
|Cost of revenues                           |  |                                 |    |      |                                | 28     |      |  |      | 27 |  |   | 590    |  
|                                           |  |                                 |    |      |                                |        |      |  |      |    |  |   |        |  
|Gross profit (loss)                        |  | $                               | 7  |      | $                              | 52     |      |  | $    | 72 |  | $ | (283   | )
|                                           |  |                                 |    |      |                                |        |      |  |      |    |  |   |        |  
|Income (loss) from operations              |  | $                               | 61 |      | $                              | (1,273 | )    |  | $    | 8  |  | $ | (6,907 | )
|Interest (expenses) income, net            |  |                                 |    |      |                                | (3     | )    |  |      | 3  |  |   | (14    | )
|                                           |  |                                 |    |      |                                |        |      |  |      |    |  |   |        |  
|Income (loss) from discontinued operations |  | $                               | 61 |      | $                              | (1,276 | )    |  | $    | 11 |  | $ | (6,921 | )
|                                           |  |                                 |    |      |                                |        |      |  |      |    |  |   |        |  



Income (loss) from
discontinued operations includes:



| | (1) | The amortization of identifiable assets in the three and nine month periods ending on September 30, 2003 of $0 and $516,000, respectively; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Severance expenses and termination of contractual obligations, accounted for according to SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities), as
follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                       |  |                   |     |   |                                      |   |     |       |  |   |     |  
|---------------------------------------------------------------------- |  | ----------------- | --- | - | ------------------------------------ | - | --- | ----- |  | - | --- | -
|                                                                       |  | Severanceexpenses |     |   | Termination ofcontractualobligations |   |     | Total | 
|                                                                       |  | In thousands      |    
|Balance as of December 31, 2003                                        |  | $                 | 72  |   |                                      | $ | 10  |       |  | $ | 82  |  
|Incurred expenses paid during the nine months ended September 30, 2004 |  |                   | (72 | ) |                                      |   | (10 | )     |  |   | (82 | )
|                                                                       |  |                   |     |   |                                      |   |     |       |  |   |     |  
|Balance as of September 30, 2004                                       |  | $                 |    |   |                                      | $ |    |       |  | $ |    |  
|                                                                       |  |                   |     |   |                                      |   |     |       |  |   |     |  

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



Liquidity and Capital Resources



As of September 30, 2004, we had $47.3 million of cash, cash equivalents and short-term investments. In the first nine months of 2004, net cash used in operations was $10.5 million, comprised mainly of (1) our loss of $12.6 million, (2)
changes in other working capital accounts of $0.1 million, and (3) non-cash charges of (a) depreciation and amortization of $1 million (b) acquisition of research and development in process of $1.4 million and (c) income related to stock
compensation of $0.4 million. In the first nine months of 2003, net cash used in operations was $10.3 million, comprised mainly of (1) our net loss of $12 million and (2) changes in other working capital accounts of $2.2 million, partially offset by
(a) non-cash charges of $1.1 million for depreciation and amortization and (b) $2.6 million of impairment of identifiable intangible assets, property and equipment and goodwill.



In the first nine months of 2004, net cash provided by investing activities was $5.6 million, comprised of our sales and
maturities of short-term investments net of our purchase of short-term investments of $6.5 million, partially offset by an outflow from: (1) net costs related to the acquisition of Xtend amounting to $0.5 million and (2) purchases of property and
equipment amounting to $472,000. In the first nine months of 2003, net cash provided by investing activities was $6.2 million, comprised mainly of our proceeds from sales and maturities of short-term investments net of our purchase of short-term
investments of $6.5 million, partially offset by an outflow of approximately $277,000 for investments in property and equipment.



Financing activities in the first nine months of 2004 amounted to approximately $1.1 million of proceeds from stock option exercises. Financing activities
in the first nine months of 2003 amounted to approximately $163,000 of proceeds from purchases of stock under our employee stock purchase plan.



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



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RISK FACTORS



This Form 10-Q contains forward-looking statements concerning our existing and future products, markets, expenses, revenues, liquidity, performance and
cash needs as well as our plans and strategies. These forward-looking statements involve risks and uncertainties and are based on current management expectations. Many factors could cause actual results and events to differ significantly from the
results anticipated by us and described in these forward looking statements, including but not limited to the following risk factors. In these risk factors our use of terms such as we and our refers to both Vyyo Inc. and our
subsidiary Xtend, except where information regarding Xtend is provided separately.



Vyyo Inc. and Xtend 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 losses for the foreseeable future. We incurred losses of
approximately $12.6 million in the first nine months of 2004. As of September 30, 2004, our accumulated deficit was approximately $187.9 million. In response to the significant decline in our business and revenues which began in 2001 and has
continued through the present, we have decreased our operating expenses in our wireless business; however, our expenses will continue to be significantly greater than our gross margin on revenues for the foreseeable future. In addition, we recently
increased our sales and marketing expenditures and research and development expenditures in connection with our increased efforts in Asia. Our revenues and gross margins may not grow or even continue at their current level and may decline even
further. Our gross margins have been favorably affected by sales of inventory that had been previously written off. If our revenues do not rapidly increase, or if our expenses increase at a greater pace than our revenues, we will never become
profitable.



If the adoption of broadband wireless technology continues to
be limited, we will not be able to sustain our business.



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



While we are continuing to operate our traditional Fixed Broadband Wireless business and have increased our sales and marketing efforts and research and
development efforts to address the China market and other new markets, we are also considering a variety of alternatives to this business, including the sale, divestiture, license or restructuring of a substantial portion or all of our current fixed
wireless broadband technology or assets. In the event of any such transaction, the value we may realize in the current market could be minimal.



Xtends success will depend on the cable industrys willingness and ability to substantially increase the available bandwidth on their networks using
Xtends alternative technology solution.



For our
products to be sold in significant quantities, cable television operators (MSOs) must be willing and able to substantially increase the available bandwidth on their networks. MSOs may not be able to develop additional services and
revenues streams to justify the deployment of Xtends technology. Meanwhile, major MSOs have indicated that the imminent completion of significant network upgrades, which involve significant labor and construction costs, will lead to lower
capital expenditures in the future. MSOs such as Adelphia Communications have been in bankruptcy proceedings. If our product portfolio and product development plans do not position us well to capture an increased portion of the expected reduced
capital spending of these cable operators, our operating results would be adversely affected.



In the past, specific factors contributing to lower capital spending in the cable industry have included:



| |  | uncertainty and delay relating to the development of digital video and cable modem industry standards;
| | - | ------------------------------------------------------------------------------------------------------



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| |  | delays in the evaluation of new services and system architectures by many cable television operations;
| | - | ------------------------------------------------------------------------------------------------------



| |  | proposed business combinations, restructurings and bankruptcies by major cable television operators and the related regulatory review and/or legal obstacles; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a focus on generating revenue from existing customers rather than network upgrades.
| | - | -----------------------------------------------------------------------------------



Xtends technology may differ materially from the major MSOs technology plans. Because the major MSOs tend to
make similar decisions regarding their technology roadmaps, a decision by a few operators, or even one operator, to proceed in a direction different from that proposed by Xtend may significantly limit the commercial potential of Xtends
products.



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



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



In addition, commencing in
2001 and continuing through 2003, the market for telecommunications equipment significantly declined, which severely adversely affected the entire telecommunications industry, including service providers, systems integrators and equipment providers,
and reduced the business outlook and visibility of the industry. In connection with the deterioration of global economic conditions, many of our customers and potential customers are also currently unable to obtain debt or equity financing for
deployment of their wireless access networks and therefore do not currently have adequate capital resources to purchase our products. Telecommunications service providers such as WorldCom (now MCI) have been in bankruptcy proceedings.



Market conditions remain difficult and capital spending plans are often
constrained. It is likely that further industry restructuring and consolidation will take place. Companies that have historically not had a large presence in the broadband access equipment market have begun recently to expand their market share
through mergers and acquisitions. The continued consolidation of our competitors could have a significant negative impact on us. Further, our competitors may bundle their products or incorporate functionality into existing products in a manner that
discourages users from purchasing our products or which may require us to lower our selling prices resulting in lower gross margins.



If the telecommunications market, and in particular the market for broadband access equipment, does not improve and grow, our business will be
substantially harmed.



If the communications, Internet and cable television
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, the cable television industry and, in particular, the Internet. These
markets continue to evolve rapidly because of advances in technology and changes in customer demand. We cannot predict growth rates or future trends in technology development. It is possible that cable television operators, telecommunications
companies or other suppliers of broadband services will decide to adopt alternative architectures or technologies that are incompatible with our current or future products. If we are unable to design, develop, manufacture and sell products that
incorporate or are compatible with these new architectures or technologies, our business will suffer. Also, decisions by customers to adopt new technologies or products are often delayed by extensive evaluation and qualifications processes and can
result in delays of current products.



In addition, the
deregulation, privatization and economic globalization of the worldwide communications market, which resulted in increased competition and escalating demand for new technologies and services, may not continue in a manner favorable to us or our
business strategies. In addition, the growth in demand for Internet services and the resulting need for high-speed or enhanced communications products may not continue at its current rate or at all.



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



We recently acquired Xtend, a provider of infrastructure solutions that expand the bandwidth of cable television lines. 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 may be unsuccessful in operating Xtend as a profitable business as we were unable to operate Shira as a
profitable business. In addition, we may have difficulty integrating Xtends or other companies personnel, operations, products and technologies into our current business. It also may be difficult to manage Xtend since most of its
management is currently in Israel and in Atlanta, Georgia. These difficulties may disrupt our ongoing business, divert the time and attention of our management and employees and increase our expenses. Moreover, the anticipated benefits of our
acquisition of Xtend or any other acquisition may not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other
identifiable intangible assets and the incurrence of large and immediate write-offs, any of which could seriously harm our business. In addition, we expect that we will expend significant resources in searching for and investigating new business
opportunities, and may be unsuccessful in acquiring new businesses.



If
Xtend fails to achieve significant market penetration and customer acceptance of its products, its prospects would be substantially harmed.



The market for broadband products in the cable television industry is extremely competitive, subject to drastic technological changes and highly
fragmented. Xtend has not generated any revenue. Its products are new and relatively unknown. To date, Xtend has only begun to install its product with customers in field trials. There can be no assurance that Xtends initial installations will
be successful. As an early stage operation, Xtend may face challenges such as market resistance to a new product, perceptions regarding customer support and quality control.



Xtend will generate significant sales only if it is able to penetrate this market and create market share in this industry.
If Xtend is unable to do so, its business would be harmed and its prospects significantly diminished.



Xtend will need to develop distribution channels and management resources to market and sell its products.



Xtend is at a very early stage in the commercialization of its products. Xtend currently has strictly limited relationships with potential customers and
distributors as well as limited professional sales staff. Xtend will be successful only if it is able to develop distribution channels to market and sell its products.



In order to develop such channels and market and sell its products, Xtend will need to build a well-connected team of
executives and marketing professionals. Many of these executive and professionals will likely need to be based in the United States. It may be difficult for Xtend to hire and retain qualified personnel. Integrating new personnel, particularly
U.S.-based personnel, into Xtend may be challenging from a culture and logistics perspective because most of Xtends employees are currently based in Israel. Meanwhile, the management of Vyyo Inc. has very limited experience in the cable
industry.



Xtend currently has limited exposure to global
business opportunities. It will not be able to take advantage of any meaningful potential global demand for its products unless and until it is able to develop global distribution channels and strategies.



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We will depend on cable and telecommunications industry capital spending for much of our revenue and any decrease or
delay in such spending would adversely affect our prospects.



Demand for our products and those of Xtend will depend on the size and timing of capital expenditures by telecommunications service providers and MSOs. These capital spending patterns are dependent upon factors including:



| |  | the availability of cash or financing;
| | - | --------------------------------------



| |  | budgetary issues;
| | - | -----------------



| |  | regulation and/or deregulation of the telecommunications industry;
| | - | ------------------------------------------------------------------



| |  | competitive pressures;
| | - | ----------------------



| |  | alternative technologies;
| | - | -------------------------



| |  | overall demand for broadband services, particularly relatively new services such as voice over Internet Protocol;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | industry standards;
| | - | -------------------



| |  | the pattern of increasing consolidation in the industry; and
| | - | ------------------------------------------------------------



| |  | general consumer spending and overall economic conditions.
| | - | ----------------------------------------------------------



If MSOs and telecommunications service providers do not make significant capital expenditures, our prospects could be adversely affected.



Xtend will depend on future demand for additional bandwidth by the cable industry and its
end customers.



Because Xtends products
expand available bandwidth over existing infrastructure, demand for our products depends on demand for additional bandwidth by the cable industry and its end customers. The scope and timing of end user demand for such additional bandwidth is
uncertain and hard to predict. The factors influencing this demand include competitive offerings, applications availability, pricing models, costs, regulatory requirements and the success of initial roll-outs. If the future demand for bandwidth is
insubstantial, is addressed by alternative technologies or does not develop in the near future, Xtends prospects will be adversely affected.



Our participation or lack of participation in industry standards groups, such as the WiMax Forum, may adversely affect our business.



We are members of the WiMax Forum, an industry standards organization
promoting deployment of broadband wireless access networks using the IEEE 802.16 standard. However, neither Vyyo Inc. nor Xtend is currently active in the standards process of the Cable Television Laboratories, Inc., a cable industry consortium that
establishes cable technology standards and administers compliance testing. In the future, we may determine to join or not join other standards or similar organizations. Our membership in these organizations could dilute our proprietary intellectual
property rights in our products while our failure to participate in others could jeopardize acceptance of any of our products that do not meet industry standards.



We have not yet developed a WiMax-compatible platform and some of our competitors are likely further along in their planning
with respect to WiMax.



Product standardization, as may result from the
WiMax initiative or from initiatives of the major cable operators, may adversely affect our prospects and those of Xtend.



Product standardization initiatives encouraged by telecommunications companies and cable operators may adversely affect revenues, gross margins and
profits. In the past, standardization efforts by major cable operators have negatively impacted equipment vendors by leading to equipment obsolescence, commoditization and reduced margins. If our products are not compliant with future standards, our
prospects could be adversely affected.



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



Sales outside of North America accounted for approximately 80% of our revenues in the first nine months of 2004. In
addition, we maintain research and development facilities in Israel. Our reliance on international



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sales, operations and suppliers exposes us to foreign political and economic risks, which may impair our ability to
generate revenues. These risks include:



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



| |  | terrorist acts, international conflicts and acts of war;
| | - | --------------------------------------------------------



| |  | 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;
| | - | ----------------------------------------------------



| |  | labor shortages or stoppages;
| | - | -----------------------------



| |  | trade restrictions and tax policies; and
| | - | ----------------------------------------



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



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



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.



There has been
significant price erosion in the broadband equipment field. We expect that continued price competition among broadband access equipment and systems suppliers will reduce our gross margins in the future, particularly in Asia. We anticipate that the
average selling prices of broadband 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.



Our future growth depends on market acceptance of several emerging broadband services, on the adoption of new broadband technologies and on several other broadband
industry trends.



Future demand for our and Xtends
products will depend significantly on the growing market acceptance of several emerging broadband services, including digital video; video-on-demand (VOD); high definition (HD) television; very high-speed data services and voice-over-IP (VoIP)
telephony. The effective delivery of these services will depend in part on a variety of new network architectures, such as fiber-to-the premises (FTTP) networks; new video compression standards such as MPEG-4 and Microsofts Windows Media 9;
the greater use of protocols such as IP; and the introduction of new consumer devices, such as advanced set-top boxes and digital video recorders (DVRs). If adoption of these emerging services and/or technologies is not as widespread or as rapid as
we expect, our net sales growth will be materially and adversely affected.



Furthermore, other technological, industry and regulatory trends will affect the growth of our business. These trends include the following:



| |  | convergence, or the desire of certain operators to provide a combination of video, voice and data services to consumers, also known as the triple play;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the use of digital video by businesses and governments;
| | - | -------------------------------------------------------



| |  | the privatization of state-owned telecommunication companies in other countries;
| | - | --------------------------------------------------------------------------------



| |  | efforts by regulators and governments in the United States and abroad to encourage the adoption of broadband and digital technologies; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | the extent and nature of regulatory attitudes towards such issues as competition between operators, access by third parties to networks of other operators, and new services such as
VoIP.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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 broadband access equipment and systems by the major service
providers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the fact that we often recognize a substantial proportion of our revenues in the last few weeks of each quarter;
| | - | ----------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



Our sales and operations in Asia, and
China in particular, could be disrupted if contagious diseases spread.



The spread of Severe Acute Respiratory Syndrome (SARS) and avian influenza (Bird Flu) in Asia, and China in particular, has disrupted commerce in the region. If SARS, Bird Flu or other
contagious diseases spread in Asia, and China in particular, the markets for our products there may be adversely affected. In addition, we will likely restrict the travel of our sales and technical personnel to China if such diseases are not
contained, which could adversely affect our ability to market and sell our products in China and provide technical assistance to our customers in China. In addition, a restriction of flights in China could disrupt shipments of our products into
China and delay or curtail sales of our products. If SARS, Bird Flu or other contagious diseases spread beyond Asia, other world markets for our products may also be adversely affected.



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



During 2001, the global
telecommunications market, and in particular the fixed wireless broadband access market, experienced a significant downturn. We experienced dramatic decreases in the sales of our products and the adoption of our technology in 2001, and our sales
have continued at a reduced level through 2004. In this environment, we determined in 2001 that significant expenditures in our historical products and technology were not justified, and we reduced our workforce by approximately 75%, from 240
employees to 60 employees. During 2002 and the first quarter of 2003, our workforce in the wireless broadband access business further declined by seven employees, to 53 employees at March 31, 2003. In the second, third and fourth quarters of 2003,
as well as the first nine months of 2004, we increased our sales and marketing expenses and research and development expenses in connection with our increased efforts in China. However, after the acquisition of Xtend, as of September 30, 2004, we
and our subsidiaries only had 128 employees worldwide.



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



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



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



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



In August 2003, the Board of Directors determined to cease all of Shiras business operations and terminate all of
Shiras employees. Vyyo made this decision due to the continuing decline in Shiras sales, Shiras recurring losses and its inability to penetrate the market. In addition, Vyyo is exploring the sale of Shiras remaining assets.
Vyyo would likely receive only minimal value, if any, in a sale of Shiras assets.



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



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



Our
Chief Financial Officer, one of our directors and many Vyyo and Xtend 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.



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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.



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



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



If we determine to continue to pursue other products and
business opportunities, we may not be successful in effecting any such transactions on favorable terms, or at all, which could adversely affect our future prospects.



In addition to further developing our traditional broadband access systems business and the business of our new subsidiary
Xtend, we also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. We have invested, and we expect that we will continue to invest, significant time and resources
searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.



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 market, which would adversely affect our business.



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



The cable industry is also heavily regulated and changes in the regulatory
landscape may adversely affect Xtends business. For example, cable operators are currently required to carry a significant number of analog channels. A reduction or elimination of this requirement may free bandwidth for these operators and
reduce the potential market for Xtends products.



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



The market for broadband access equipment and systems is intensely competitive, rapidly evolving and subject to rapid technological change. The main
competitive factors in our and Xtends markets include:



| |  | product performance, features and reliability;
| | - | ----------------------------------------------



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| |  | price;
| | - | ------



| |  | stability;
| | - | ----------



| |  | scope of product line;
| | - | ----------------------



| |  | sales and distribution capabilities;
| | - | ------------------------------------



| |  | technical service and support;
| | - | ------------------------------



| |  | relationships, particularly those with system integrators and operators; and
| | - | ----------------------------------------------------------------------------



| |  | industry standards.
| | - | -------------------



Certain of our and Xtends 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, broader product lines and established relationships with system
integrators and service providers. Our primary competitors are Alvarion Inc., Wi-LAN Inc., SR Telecom, Harris Corporation, Cambridge Wireless Limited, Flarion, VCOM, Airspan and ZTE Corporation. Xtends primary competitors include Scientific
Atlanta, Motorola, C-Core and Narad Networks. Most of these competitors have existing relationships with one or more of our prospective customers, and many of these companies are operating and increasing their presence in the China market, on which
we believe a substantial portion our business will depend. For our broadband wireless offerings, we face competition from technologies such as digital subscriber line, fiber and cable. In the cable industry, Xtends cable offerings face
competition from technologies such as digital set-top boxes, high-end compression technologies and DVRs. Furthermore, the move towards open standards may increase the number of operators who will offer new services, which in turn may increase the
number of competitors and drive down the capital expenditures per subscriber deployed. We may not be able to compete successfully against our current and future competitors, and competitive pressures may seriously harm our business.



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



Our systems will occasionally contain certain 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. This may be observed in
connection with stability or other performance problems. Our customers integrate our systems into their networks with components from other vendors. Accordingly, when problems occur in a network system, it may be difficult to identify the component
that caused the problem. Regardless of the source of these defects or errors, we will need to divert the attention of our engineering personnel from our product development efforts to address the defect or error. We have incurred in the past and may
again incur significant warranty and repair costs related to defects or errors, and we may also be subject to liability claims for damages related to these defects or errors. The occurrence of defects or errors, whether caused by our systems or the
components of another vendor, may result in significant customer relationship problems and injury to our reputation and may impair the market acceptance of our systems.



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



We currently have relationships with a limited number of contract manufacturers for the manufacturing of our broadband
wireless systems, which contractors are located in Israel, Taiwan and China. Xtends products are manufactured in Israel by contract manufacturers. 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



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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 written
agreement with a manufacturer for our modem products. Our current inventory of modems will likely be insufficient to fulfill anticipated demand, and we will therefore be required to find a manufacturer in the near future. Our inability to enter into
a written agreement with a manufacturer for our modems would harm our business.



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



Xtends products are implemented
over the hybrid fiber coaxial plant and, as such, they interface and integrate with existing products from multiple other vendors. Future offerings by these vendors may not be sufficiently compatible with Xtends products. In addition, Xtend
depends on the continuous delivery of components by various manufacturers of electronic connectors, filters, boards and transistors.



Xtend has not yet manufactured or deployed its products in high volumes.



Xtend products have not yet been produced in high volumes and there may be challenges and unexpected delays, such as quality control issues, in its
attempts to increase volume and lower production costs. Our long term success depends on our ability to produce high quality products at a low cost and, in particular, to reduce the production cost of Xtend equipment designed for residential use.



Because Xtends products have not yet been deployed in
high volume, there is significant technology risk associated with any such future deployment. There can be no assurances that any such high volume deployment would be successful.



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.



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If we do not effectively manage our costs, our business could be substantially harmed.



Although we reduced the costs of our fixed broadband wireless operations in
response to the decline in the telecommunications industry that began around 2001, we have recently increased certain expenses to address international market opportunities, particularly in China, and we will need to continue to monitor closely our
costs and expenses. If the market and our business do not expand, we may need to reduce further our operations.



The acquisition of Xtend will cause our costs to increase as we seek to develop its business. In addition, the acquisition agreement itself calls for
payment to certain shareholders of Xtend as part of the purchase price, subject to various performance criteria.



We depend on our key personnel, in particular Davidi Gilo, our Chairman of the Board and Chief Executive Officer, and Michael Corwin, our President and Chief Operating
Officer, the loss of either of whom could seriously harm our business.



Our future success depends in large part on the continued services of our senior management and key personnel. In particular, we are highly dependent on the services of Davidi Gilo, our Chairman of the Board and Chief
Executive Officer, and Michael Corwin, our President and Chief Operating 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 Michael Corwin, other members of senior
management or other key personnel could seriously harm our business.



Delays
and shortages in the supply of components from our suppliers and third party 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.



Third parties 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 and our ability to provide unique products may be compromised.



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



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



We regularly evaluate and seek to explore and develop derivative products
relating to our broadband access equipment and systems. We may not be able to secure all desired intellectual property protection relating to such derivative products. Furthermore, because of the rapid pace of change in the broadband industry, much
of our business and many of our products rely on technologies that evolve constantly and this continuing uncertainty make it difficult to forecast future demand for our products.



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



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



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



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



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



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



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



We may have to raise funds even sooner in order to fund more rapid expansion, to develop the business of our subsidiary Xtend, 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.



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



The emergence or evolution
of regulations and industry standards for broadband 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.



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



We are incurring additional costs and devoting more management resources to comply with
increasing regulation of corporate governance and disclosure.



We are spending an increased amount of management time and external resources to understand and comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations and rules of the Nasdaq National Market, the market on which our shares are listed. Allocating the necessary resources to comply with evolving corporate governance and public disclosure standards has increased general and
administrative expenses and caused a diversion of management time and attention to compliance activities.



Recent and proposed regulations related to equity compensation could adversely affect earnings, affect our ability to raise capital and affect our ability to attract and retain key personnel.



Since our inception, we have used stock options as a fundamental component
of our employee compensation packages. We believe that our stock option plans are an important tool to link the long-term interests of stockholders and employees, especially executive management, and serve to motivate management to make decisions
that will, in the long run, give the best returns to stockholders. The Financial Accounting Standards Board has proposed changes to the United States generally accepted accounting principles, or U.S. GAAP, that, if implemented, would require us to
record a charge to earnings for employee stock option grants, as well as other equity-based awards. While the ultimate outcome of this proposal is not yet certain, the proposal would most likely negatively impact our earnings and could affect our
ability to raise capital on acceptable terms. In addition, new regulations implemented by the Nasdaq National Market requiring stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the
future. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate
employees, each of which could materially and adversely affect our business.



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



Certain 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, Vyyo Ltd. and Xtend, have accumulated loss carry-forwards for Israeli tax purposes and
therefore has not enjoyed any tax benefits under current approved enterprise programs.



In the past, Vyyo and Xtend have received grants from the government of Israel for the financing of a portion of our research and development expenditures for previous products in Israel. The regulations under which
we received these grants restrict our ability to manufacture products or transfer technology outside of Israel for products developed with this technology. Furthermore, these grants may not be available to us in the future.



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The government of Israel has decided to cancel, as of June 30, 2004, the ability of companies to submit
new applications for approved enterprise status. This change in the government policy may hinder us in the future with respect to any benefits we may have received for new undertakings which would have been entitled to approved
enterprise status.



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



Several members of our board of directors, Lewis Broad, Neill Brownstein, Avraham Fischer, Samuel Kaplan and Alan Zimmerman, and our President and Chief
Operating Officer, Michael Corwin, have had professional relationships with our Chairman of the Board, Davidi Gilo, and his affiliated companies for several years. These members of our board of directors previously served on the boards of directors
of DSP Communications, Inc. and/or DSP Group, Inc., of which Mr. Gilo was formerly the controlling stockholder and the Chairman of the Board, and Mr. Corwin previously served as an officer of DSP Group. In addition, Avraham Fischer is a senior
partner of the law firm of Fischer, Behar, Chen & Co., which represents us on matters relating to Israeli law, and is an investor and co-Chief Executive Officer of an Israeli investor group in which Mr. Gilo is also an investor. There are no
family relationships between these directors and officers, and no member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member
of our board of directors or compensation committee. However, the long-term relationships between these directors and officers and Mr. Gilo and his affiliated companies could be deemed to limit their independence. The extensive business activities
of our board members could cause new facts to develop that could also be deemed to limit their independence.



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



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



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



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



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



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



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



We rely on a continuous power supply to conduct our operations, and any
electrical or natural resource crisis could disrupt our operations and increase our expenses.



We rely on a continuous power supply for manufacturing and to conduct our business operations. Interruptions in electrical power supplies occur around the
world from time to time. Meanwhile, prices of the resources, such as electrical power and crude oil, upon which we ultimately rely, directly or indirectly, in running our business have been volatile. Power shortages, as have occurred in California
and China, could disrupt our manufacturing and business operations and those of many of our suppliers, and could cause us to fail to meet production schedules and commitments to customers and other third parties. Any disruption to our operations or
those of our suppliers could result in damage to our current and prospective business relationships and could result in lost revenue and additional expenses, thereby harming our business and operating results.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



As of September 30, 2004, we had cash, cash equivalents and short-term investments of $47.3 million. Substantially all of these amounts consisted of corporate and government fixed income securities and money market
funds that invest in corporate and government fixed income securities that are subject to interest rate risk. We place our investments with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.



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



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



Quantitative Interest Rate Disclosure as of September 30, 2004



If market interest rates were to increase on September 30, 2004 immediately and uniformly by 10%, the fair value of the portfolio would decline by approximately $46,000, or approximately 0.11% of the total portfolio
(approximately 0.08% of total assets). Assuming that the average yield to maturity on our portfolio at September 30, 2004 remains constant throughout the fourth quarter of 2004 and assuming that our cash, cash equivalents and short-term investments
balances at September 30, 2004 remain constant for the duration of the fourth quarter of 2004, interest income for the fourth quarter of 2004 would be approximately $207,000. Assuming a decline of 10% in the market interest rates at September 30,
2004, interest income for the fourth quarter of 2004 would be approximately $204,000, which represents a decrease in interest income of approximately $3,000. 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 September 30, 2004. These amounts are determined by considering the impact of the hypothetical interest rates on our cash equivalents and available-for-sale securities at September
30, 2004 over the remaining contractual lives.



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Item 4. Controls and Procedures



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



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



PART II. OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



None.



Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



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



From April 3, 2000
until September 30, 2004, we used approximately $7.1 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, approximately $1.6 million of the net proceeds in connection with the Xtend Transaction and approximately $72.4 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 $94.688 per share for an aggregate public offering price of the shares we sold of $55.2 million. After deducting the underwriting discounts and commissions of $2.9 million and the
offering expenses of approximately $1.0 million, the net proceeds to us from the offering were approximately $51.3 million.



From September 13, 2000, until September 30, 2004, we used approximately $2.3 million of the net offering proceeds for purchases of property, plant and
equipment and the acquisition of Xtend and approximately $7.1 million of the net offering proceeds for working capital.



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



None.



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Item 5. OTHER INFORMATION



| | (a) | None.
| | --- | -----



| | (b) | None.
| | --- | -----



Item 6. EXHIBITS AND REPORTS ON FORM 8-K



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



| | 31.1 | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
| | ---- | --------------------------------------------------------------------------------------------------------------------------



| | 31.2 | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
| | ---- | --------------------------------------------------------------------------------------------------------------------------



| | 32.1 | 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.
| | --- | --------------------



On July 1, 2004, Vyyo filed a report on Form 8-K furnishing under Item 5 of the Form 8-K a press release announcing the completion of its acquisition of
Xtend Networks Ltd.



On July 15, 2004, Vyyo filed a report on
Form 8-K furnishing under Items 2 and 7 of the Form 8-K, and pursuant to Item 12 of the Form 8-K, disclosures regarding its acquisition of the assets of Xtend Networks Ltd., as well as financial information and exhibits in connection with the
acquisition.



On July 28, 2004, Vyyo filed a report on Form
8-K furnishing under Item 7 of the Form 8-K, and pursuant to Item 12 of the Form 8-K, its financial results for the quarter ended June 30, 2004.



On September 13, 2004, Vyyo filed an amendment to a previously filed report on Form 8-K furnishing under Item 9.01 of the Form 8-K financial statements
relating to Xtend Networks Ltd.



On September 20, 2004, Vyyo
filed a report on Form 8-K furnishing under Item 2.02 of the Form 8-K its announcement that it was lowering its revenue expectations.



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##### Table of Contents

SIGNATURES



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



Date: November 12, 2004



|          |  |                                                          
|--------- |  | ---------------------------------------------------------
|VYYO INC.
|          | 
|By:       |  | /s/ Davidi Gilo                                          
|          |  | Davidi Gilo, Chief Executive Officer                     
|          |  | (Duly Authorized Officer)                                
|          | 
|By:       |  | /s/ Arik Levi                                            
|          |  | Arik Levi, Chief Financial Officer                       
|          |  | (Duly Authorized Officer and Principal Financial Officer)



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##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                               
|31.1           |  | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                            
|               | 
|31.2           |  | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                            
|               | 
|32.1           |  | 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).



46