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UNITED
STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





(Mark One)





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





For the Quarterly Period Ended
March 31, 2002





or





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





For the transition period from
 to





Commission File Number: 0-30189





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VYYO
INC.


(Exact name of registrant as specified in its charter)





Delaware (State or other jurisdiction of incorporation or organization)

94-3241270 (I.R.S. Employer Identification Number)20400 Stevens Creek Boulevard, 8th Floor, Cupertino,
California

95014(Address of Principal Executive Offices)

(Zip Code)





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





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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  ̈





As of March
31, 2002, there were 36,868,478 shares of Common Stock ($0.0001 par value) outstanding.





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INDEX





VYYO INC.





Page No.PART I.    FINANCIAL INFORMATIONItem 1.

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

3Condensed consolidated statements of operationsthree months ended March 31, 2002 and March 31, 2001

4Condensed consolidated statements of cash flowsthree months ended March 31, 2002 and March 31, 2001

5Notes to condensed consolidated financial statements

6Item 2.

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

11Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings

26Item 2.

Changes in Securities and Use of Proceeds

26Item 3.

Defaults upon Senior Securities

27Item 4.

Submission of Matters to a Vote of Security Holders

27Item 5.

Other Information

27Item 6.

Exhibits and Reports on Form 8-K

28SIGNATURE

29




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Part I.    Financial Information





Item 1.Condensed Consolidated Financial Statements





Vyyo Inc.


Condensed Consolidated Balance Sheets


(In Thousands)





March 31, 2002


December 31, 2001(Unaudited)


(Note 1)AssetsCURRENT ASSETS:Cash and cash equivalents

$
23,939


$
17,380Short-term investments


56,908



66,689Accounts receivable


1,034



729Inventory


352



693Other


644



601Total current assets


82,877



86,092PROPERTY AND EQUIPMENT, net


1,692



1,948Total assets

$
84,569


$
88,040Liabilities and stockholders equityCURRENT LIABILITIES:Accounts payable

$
897


$
827Accrued liabilities


5,432



6,546Accrued restructuring liability


2,547



2,815Total current liabilities


8,876



10,188COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.0001 par value at amounts paid in and additional paid in capital; 200,000,000 shares authorized; 36,868,478 and
36,792,420 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively


228,105



228,122Note receivable from stockholder


(37
)Deferred stock compensation


(300
)


(600
)Accumulated other comprehensive income


152



721Accumulated deficit


(152,227
)


(150,391
)Total stockholders equity


75,693



77,852$
84,569


$
88,040





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





|Note 1: |  | The condensed consolidated balance sheet at December 31, 2001 has been derived from audited financial statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements.
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3




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Vyyo Inc.


Condensed Consolidated Statements of Operations


(In Thousands Except Per Share Data)


(Unaudited)





Three Months Ended March 31,2002


2001NET REVENUES

$
1,815


$
669COST OF REVENUES (in 2001, includes $7,914 write-offs of excess inventory and purchase commitments)


904



8,900GROSS PROFIT (LOSS)


911



(8,231
)OPERATING EXPENSES:Research and development


1,035



5,534Selling and marketing


1,082



2,331General and administrative


1,309



2,822Restructuring charges






4,573Charge for stock compensation


222



4,012Total operating expenses


3,648



19,272OPERATING LOSS


(2,737
)


(27,503
)INTEREST AND OTHER INCOME, net


901



1,752NET LOSS

$
(1,836
)

$
(25,751
)NET LOSS PER SHAREBasic and diluted

$
(0.05
)

$
(0.70
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGBasic and diluted


36,709



36,983





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




4




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Vyyo Inc.


Condensed Consolidated Statements of Cash Flows


(In Thousands)


(Unaudited)





Three Months Ended March 31,2002


2001CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(1,836
)

$
(25,751
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and other


264



912Amortization and charge related to stock compensation


222



4,012Changes in assets and liabilities:Accounts receivable


(305
)


2,244Other current assets


(43
)


176Inventories


341



1,211Accounts payable


70



(2,945
)Accrued liabilities


(1,114
)


1,924Restructuring liabilities


(268
)


4,105Net cash used in operating activities


(2,669
)


(14,112
)Investing activitiesPurchase of property and equipment


(10
)


(1,561
)Proceeds from sales and maturities of short-term investments


22,626



17,625Purchase of short-term investments


(13,414
)


(11,218
)Proceeds from sale of property and equipment


2



24Net cash provided by investing activities


9,204



4,870Financing activitiesRepurchase of common stock






(9,057
)Issuance of common stock


24



232Net cash provided by (used in) financing activities


24



(8,825
)Increase (decrease) in cash and cash equivalents


6,559



(18,067
)Cash and cash equivalents at beginning of year


17,380



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

$
23,939


$
15,924





The accompanying notes are an integral part of the 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. (Vyyo or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of manage­ment, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. For further information, refer
to the consolidated financial statements and notes thereto for the year ended December 31, 2001, included in the annual report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission.





Use of Estimates





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





Inventory





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





During the year 2001, the Company
recognized a write-down of excess inventory of $7.5 million. The write-down was charged to the cost of revenues. In the three months ended March 31, 2002, inventory that was previously written-down to $0 by taking a charge of $197,000 was sold for
the amount of $205,000.





Loss per share





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




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Vyyo Inc.





Notes
to Condensed Consolidated Financial Statements(Continued)





(Unaudited)







2.    Inventory





Inventory is comprised of the following:





March 31,

December 31,2002

2001In thousandsRaw materials

$
25

$
25Work in process


18


109Finished goods


309


559$
352

$
693





3.    Accrued Liabilities





Accrued liabilities consist of the following:





March 31,

December 31,2002

2001In thousandsCompensation and benefits

$
1,376

$
1,895Warranty


1,259


1,363Withholding tax


1,303


1,268Other


1,494


2,020$
5,432

$
6,546





4.    Accrued Restructuring liability





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





Cumulative restructuring charge in 2001

Balance as of December 31, 2001

Utilized in 2002

To be utilizedIn thousandsFacilities

$
4,913

$
2,365

$
28

$
2,337Equipment


2,616








Employees severance and other related benefits


5,298


450


240


210$
12,827

$
2,815

$
268

$
2,547




7




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Vyyo Inc.





Notes
to Condensed Consolidated Financial Statements(Continued)





(Unaudited)







5.    Contingencies





Patent matter





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





Legal claims regarding breach of leasing agreements





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





Both the Companys and Har Hotzvims Claims are in abeyance and at this stage certain intermediate proceeding are being conducted before the court. The Company believes it has included an adequate provision in the financial
statements to cover the $2.2 million claim.





Common Stock Repurchase Program





In December 2000, the Companys board of directors authorized the repurchase of up to 4 million shares of Vyyos common stock. In March 2001, the Companys board of
directors approved an increase in the number of shares it may purchase under its repurchase program by 6 million shares. In the quarter ended March 31, 2001, the Company repurchased and retired 1.3 million shares in open market transactions for a
total cost of $9.1 million.





Former Chief Executive Officer (former CEO) separation agreement





In April 2002, according to the separation agreement entered into in October 2001, the Companys former CEO drew down on the $1,000,000 loan
provided for in this agreement. This loan is due on January 1, 2006, or earlier upon sales of the Companys shares held by such officer or upon certain other circumstances. The loan is secured solely by the 800,000 options held by such officer
and the shares of the Companys common stock underlying these options.




8




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Vyyo Inc.





Notes
to Condensed Consolidated Financial Statements(Continued)





(Unaudited)







6.    Comprehensive Income (Loss)





Total comprehensive loss was $569,000 for the three months ended March 31, 2002, and income of $633,000 for the three months ended March 31, 2001.





7.    Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No.141, Business Combinations, and SFAS No.142,
Goodwill and Other Intangible Assets. The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be
amortized. All goodwill with adoption of FAS 142 is required to be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. As the Company has not completed any business
combinations through December 31, 2001, the Company believes that these standards will not have a material impact on its financial position or operating results.





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





In
August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. This statement is effective
for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the Companys financial position, results of operations or cash flows.





8.    Subsequent Events





On
May 14, the Company entered into a Share Exchange Agreement with Shira Computers, Ltd., an Israeli privately held company that provides web-enhanced software and e-commerce products for the prepress and publishing markets (Shira), and
certain of the shareholders of Shira, providing for the acquisition all of the outstanding ordinary shares of Shira, for an aggregate of 500,000 shares of the Companys common stock, valued at approximately $560,000, based on the closing price
of the Companys common stock on May 10, 2002 of $1.12 per share. Upon completion of the transaction, Shira will become a wholly-owned subsidiary of the Company. The acquisition will be treated on the basis of the purchase method of accounting.





The consideration paid for the acquisition will be attributed to (i) acquired technology which had reached technological
feasibility and therefore will be amortize over time, (ii) in-process research and development, that was in various stages of development, which had not reached technological feasibility and has no alternative use, and therefore will expensed in the
next quarter, (iii) goodwill, which will be treated according to Statements of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets. Accordingly, the purchase price will be allocated to the fair value of the assets
acquired and liabilities assumed of Shira and will result in the next quarter.




9




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Vyyo Inc.





Notes
to Condensed Consolidated Financial Statements(Continued)





(Unaudited)







Pro-forma information in accordance with APB16 has not been provided, as the net
income and the loss per share of Shira for 2000, 2001 and for the three months ended March 31, 2002 were not material in relation to total consolidated net income and for the loss per share.





Consummation of the share exchange is subject to certain conditions, including the agreement of all of the Shira shareholders to exchange their shares, the restructuring of certain debt
of Shira, and requisite regulatory approvals.




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





The following information should be read in conjunction with the condensed consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report
and with Managements Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2001, contained in Vyyos Annual Report (Form 10-K) for the year ended December 31, 2001, filed with the
Securities and Exchange Commission. The matters addressed in this Managements Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, contain forward-looking
statements involving risks and uncertainties. Vyyos actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under the
heading Certain Factors That May Affect Future Results following this Managements Discussion and Analysis section, and elsewhere in this report.





Overview





During 2001, the global telecommunications market, and in particular the fixed
wireless broadband access market, experienced a significant downturn, and we experienced a dramatic decrease in the sales of our products. In this environment, we determined that significant expenditures in our historical products and technology may
not be justified. As a result, we reduced our workforce by approximately 75% during 2001, from 241 employees to 60 employees, and, in doing so, we reduced our research and development expenses to minimum levels. While we expect that the
telecommunications market may recover over time, substantial uncertainty exists as to the ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively
address the market as it evolves with new and competitive products and technologies may be limited due to, among other things, our limited research and development budget. While we are continuing to operate and develop our traditional wireless
business, we are also exploring a variety of alternatives, including restructuring or the licensing, sale or divestiture of a substantial portion or all of our current technology or assets. In addition to our anticipated acquisition of Shira
Computers, Ltd., we also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. See Item 5 below. We may not be able to successfully effect any of these alternatives on
a timely basis or at all.





We supply broadband wireless access systems used by telecommunications service providers to deliver
wireless, high-speed data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our systems as part of their end-to-end network solutions for service
providers. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $1.8 million for the three months ended March 31, 2002. As of March
31, 2002, our accumulated deficit was approximately $152.2 million.







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Results of Operations





Net Revenues.





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





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





Net revenues increased by 171% to $1.8 million in the first quarter of 2002 from $669,000 in the first quarter of 2001. The increase in revenues primarily reflects the increase in shipments of our products. Net
revenues in the first quarter of 2002, include revenues of approximately $205,000 from sales of inventory that was previously written down to $0, in 2001.





Cost of Revenues.





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





Cost of revenues decreased in the first quarter of 2002 to $904,000 from $8.9 million in the first quarter of 2001. The decrease in cost of revenues and the increase in the gross margin in the first quarter of 2002
was attributable primarily to: (1) charges in the first quarter of 2001 of approximately $7.9 million for excess inventory and purchase commitments, due to the dramatic downturn in the global telecommunications industry and to the decrease in orders
for and sales of our products, (2) increased shipments of our products in the first quarter of 2002, and (3) sales in the first quarter of 2002 of inventories that were previously written down to $0 in 2001 by taking a charge of $197,000.





Research and Development Expenses.





Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Substantially all of our research and
development activities are carried out in our facility in Israel. These expenses are charged to operations as incurred. Our research and development expenses decreased to $1.0 million in the first quarter of 2002 from $5.5 million in the first
quarter of 2001. These decreases were due to significant reductions in our workforce effected in the second and third quarters of 2001. As of March 31, 2002, our research and development staff consisted of 23 employees, compared to 144 employees as
of March 31, 2001. We expect that research and development expenses will decrease in future periods due to the significant reductions in our workforce effected in the second and third quarters of 2001. As a result of these decreases in research and
development activities, we may be unable to develop next generation products and new products to meet market demand.




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Selling and Marketing Expenses.





Selling and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and expenses for travel, trade shows and promotional
activities. Selling and marketing expenses decreased to $1.1 million in the first quarter of 2002 from $2.3 million in the first quarter of 2001. The decrease in selling and marketing expenses was primarily in response to the significant downturn in
the global telecommunications industry and the decrease in orders for and sales of our products. As part of this reduction in expenses, we effected a reduction in our selling and marketing workforce in the second and third quarters of 2001 and in
the first quarter of 2002. In connection with this reduction in the first quarter of 2002, we incurred a one-time charge of approximately $300,000.





General and Administrative Expenses.





General and administrative expenses consist
primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, legal, human resources and administration. General and administrative expenses decreased to $1.3 million in
the first quarter of 2002 from $2.8 million in the first quarter of 2001. The decrease was primarily due to reduction in compensation related expenses resulting from reductions in our workforce in the second and third quarters of 2001.





Restructuring Charges





In 2002, we utilized $268,00 from the restructuring expenses that were accrued in 2001. In 2001, we implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in the telecommunications
sector and the general economy. In connection with this restructuring, we recorded charges of $12.8 million. These charges are costs related to excess facilities, abandoned equipment and employees severance and other, related benefits. The
restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of our workforce. The excess facilities costs consist of rental payments for unused premises under current agreements and costs associated with the
abandonment of facilities, including lease payments and leasehold improvements invested in these premises and costs associated with the related legal claim against us. Restructuring charges of $4.6 million recorded in the first quarter of 2001
relate mostly to facilities.





Charge for Stock Based Compensation.





Charge for stock compensation represents the amortization of deferred compensation charges which are based on the aggregate differences between the respective exercise price of
stock options and purchase price of stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting purposes, as well as stock compensation charges incurred in connection with modifications of stock awards
in 2001. Deferred stock compensation is amortized over the vesting period of the underlying options. Amortization and charge related to stock compensation were $222,000, gross charges of $374,000 and a decrease in compensation of $152,000 related to
an accounting variable plan in the first quarter of 2002, and $4.0 million in the first quarter of 2001. As of March 31, 2002, unamortized deferred compensation related to options issued through the completion of the initial public offering amounted
to $300,000.





Interest and Other Income, Net.





Interest and other income, include interest and investment income. Interest income was $901,000 in the first quarter of 2002 and $1.8 million in the first quarter of 2001, 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 decrease due to decreasing cash balances and reduced interest rates in financial
markets.





Income Taxes.





As of December 31, 2001, we had approximately $60 million of Israeli net operating loss carryforwards, $6 million of United States federal net operating loss carryforwards, and $6 million of state net operating loss
carryforwards. The Israeli net operating loss carryforwards have no expiration date and have not been recorded as




13




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tax assets because the losses are expected to be utilized during a tax exempt period. The United States federal net operating loss carryforwards expire in
various amounts between the years 2011 and 2021. The state net operating loss carryforwards expire in various amounts between the years 2004 and 2006. We have provided a full valuation allowance against our United States federal and state deferred
tax assets as the future realization of the tax benefit is not sufficiently assured.





Liquidity And Capital Resources





As of March 31, 2002, we had $80.8 million of cash, cash equivalents and short-term investments. In the first three months
of 2002, cash used in operations was $2.7 million, comprised of our net loss of $1.8 million, partially offset by a non-cash charges of $222,000 for deferred stock compensation charges, $264,000 for depreciation and changes in other working capital
accounts of $1.3 million. In the first three months of 2001, cash used in operations was $14.1 million, comprised of our net loss of $25.8 million, partially offset by non-cash charges of $4.9 million for stock compensation charges $912,00 for
depreciation and asset write-down and changes in working capital accounts of $6.8 million.





Investing activities in the first
quarter of 2002, excluding purchases and proceeds from short-term investments, amounted to approximately $8,000 for investments in property and equipment. Investing activities in the first quarter of 2001, excluding purchases and proceeds from
short-term investments, amounted to approximately $1.5 million for investments in property and equipment.





Financing activities
in the first quarter of 2002 amounted to approximately $24,000 of proceeds from stock option exercises. Financing activities in the first three months of 2001 resulted in a net outflow of $8.8 million due to stock repurchases in the amount of $9.1
million, partially offset by proceeds from stock option exercises.





As of March 31, 2002, we had approximately $135,000 of
inventory purchase obligations. As of March 31, 2001, we had approximately $4.7 million of inventory purchase obligations. In the first quarter of 2001, we recorded a charge of $4.3 million for inventory obligations in excess of estimated inventory
requirements.





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





New Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No.141, Business Combinations, and SFAS No.142, Goodwill and Other Intangible
Assets. The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual
impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. Since we did not complete any business combinations through December 31, 2001, we believe that these standards will not have a material
impact on our financial position or results of operations.





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




14




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In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. We do not expect the adoption of SFAS
No. 144 to have a material impact on our financial position, results of operations or cash flows.





CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS





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





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





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





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





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





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





If the communications and Internet industries do
not continue to 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 continued growth of the communications industry and, in particular, the Internet. The growth of the global communications and Internet industries has slowed significantly over the past two years and
these industries continue to evolve rapidly. It is difficult to predict growth rates or future trends in technology development. In addition, the deregulation, privatization and economic globalization of the worldwide communications market, which
resulted in increased competition and escalating demand for new technologies and services, may not continue in a manner favorable to us or our business strategies. In addition, the




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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.





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





During 2001, the global telecommunications market, and in particular
the fixed wireless broadband access market, experienced a significant downturn, and we experienced a dramatic decrease in the sales of our products and the adoption of our technology. In this environment, we determined that significant expenditures
in our historical products and technology may not be justified. As a result, we reduced our workforce by approximately 75% during 2001, from 241 employees to 60 employees, and, in doing so, we reduced our research and development expenses to minimum
levels. While we expect that the telecommunications market may recover over time, substantial uncertainty exists as to the ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and
market products that effectively address the market as it evolves with new and competitive products and technologies may be limited due to, among other things, our limited research and development budget. While we are continuing to operate and
develop our traditional wireless business, we also expect to explore a variety of alternatives, including potential restructuring or the licensing, sale or divestiture of a substantial portion or all of our technology or assets. We also expect to
explore alternatives relating to the licensing, purchase or acquisition of other products, technology, assets or businesses. We may not be able to successfully effect any of these alternatives on a timely basis or at all.





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





A relatively small number of customers account for a large percentage of our revenues. In the first quarter of 2002, Wuhan Research Institute of Posts and Telecommunication accounted for
approximately 45% of our revenues and Dalager Engineering Inc. accounted for approximately 23% of our revenues. In 2001, WorldCom Broadband Solutions, Inc. accounted for approximately 57% of our revenues and Wuhan Research Institute of Posts and
Telecommunication accounted for approximately 9% of our revenues. We have not received any new significant orders from WorldCom, nor do we expect them to continue to deploy a large number of cities in the foreseeable future. We expect that we will
continue to depend on a limited number of customers for a substantial portion of our revenues in future periods. The loss of a major customer could seriously harm our ability to sustain revenue levels, which would seriously harm our operating
results. In addition, many of our customers are dependent on obtaining funding for their deployments. The continued inability of our customers to obtain such funding will adversely affect their deployments, which would adversely affect our business.





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





We sell our 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.





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





In May 2002, we entered into an agreement to purchase Shira
Computers, Ltd., a provider of web-enhanced software and e-commerce products for the prepress and publishing markets. We also continue to explore investments in or acquisitions of other companies, products or technologies, including companies or
technologies that are not complementary or related to our current wireless broadband access business. We may have difficulty integrating Shiras or other companies personnel, operations, products and technologies into our current
business. These difficulties may disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, the anticipated benefits of our acquisition of Shira or any other acquisition may




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not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets and the incurrence of large and immediate write-offs, any of which could seriously harm our business. In addition, we expect that we will expend significant resources in searching for and
investigating new business opportunities, and may be unsuccessful in acquiring new businesses.





The consummation of the purchase
of Shira is subject to a number of conditions outside the control of Vyyo, and if some or all of those conditions are not met or waived by us, we may not purchase Shira.





The potential effects of regulatory actions could impact spectrum allocation and frequencies worldwide and cause delays or otherwise negatively impact the growth and development of the broadband wireless industry.





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





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





We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $1.8 million in the first quarter of 2002 and
$49 million in 2001. As of March 31, 2002, our accumulated deficit was approximately $152.2 million. In response to the significant decline in our business and revenues in 2001, we have decreased our operating expenses; however, our expenses will
continue to be significantly greater than our gross margin on revenues for the foreseeable future. Our revenues and gross margins may not grow or even continue at their current level and may decline even further. If our revenues do not rapidly
increase or if our gross margins do not increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.





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





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





| |  |  | the uncertain timing and level of market acceptance for our systems and the uncertain timing and extent of rollouts of wireless broadband access systems by the major service
providers;
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| |  |  | the ability of our existing and potential direct customers to obtain financing for the deployment of broadband wireless access systems;
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| |  |  | the mix of products sold by us and the mix of sales channels through which they are sold;
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| |  |  | reductions in pricing by us or our competitors;
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| |  |  | global economic conditions;
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| |  |  | the effectiveness of our system integrator customers in marketing and selling their network systems equipment; and
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| |  |  | changes in the prices or delays in deliveries of the components we purchase or license.
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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




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accordingly, which would harm our operating results in that period. We believe that period-to-period comparisons of our results of operations are not meaningful
and should not be relied upon as indicators of future performance. If our operating results fall below the expectations of investors in future periods, our share price will likely decline.





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





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





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





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





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





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





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





Our research and development, final testing and assembly facilities, and contract manufacturers are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.
Hostilities within Israel have dramatically escalated over the past several months, which could disrupt our operations. We could be adversely affected by any major hostilities involving Israel, the interruption or




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curtailment of trade between Israel and its trading partners, a significant increase in inflation, or a significant downturn in the economic or financial
condition of Israel. As a result of the hostilities and unrest presently occurring within Israel, the future of the peace efforts between Israel and its Arab neighbors is uncertain. Moreover, several countries still restrict business with Israel and
with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel or Israeli businesses.





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





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





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





| |  |  | our limited historical financial data from our wireless products;
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| |  |  | our unproven potential to generate profits; and
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| |  |  | our limited experience in addressing emerging trends that may affect our business.
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As a young company, we face risks and uncertainties relating to our ability to implement our business plan successfully. You should consider our prospects in light of the risks, expenses
and difficulties we may encounter.





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





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





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





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





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





Sales outside of North America accounted for approximately 46% of our revenues in the first quarter of 2002 and approximately 16% of our revenues in
2001. We expect that international sales may account for a substantial portion of our revenues in future periods. In addition, we maintain research and development facilities in Israel. Our reliance on international sales and operations exposes us
to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:




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




| |  |  | our international customers ability to obtain financing to fund their deployments
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| |  |  | changes in regulatory requirements and licensing frequencies to service providers;
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| |  |  | import or export licensing requirements and tariffs;
| | - |  | ----------------------------------------------------




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




| |  |  | more limited protection of intellectual property rights.
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Any of the foregoing difficulties of conducting business internationally could seriously harm our business.





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





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





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





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





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





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





In addition, during 2001, we began to focus our resources on direct sales to service providers. Such direct sales require us to resell to service providers equipment manufactured by
third party suppliers and to integrate this equipment with the equipment we manufacture. We are particularly dependent on third party radio suppliers in selling our 3.5 Ghz and other products. We currently have no formal relationship with any third
party supplier. If




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we are unable to establish relationships with suppliers, or if these suppliers are unable to provide equipment that meets the specifications of our customers on
the delivery schedules required by our customers, and at acceptable prices, our business would be substantially harmed.





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





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





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




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




| |  |  | we may not be able to develop alternative sources for system components, if or as required in the future;
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| |  |  | suppliers could discontinue the manufacture or supply of components used in our systems. In such event, we might need to modify our systems, which may cause delays in
shipments, increased manufacturing costs and increased systems prices; and
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| |  |  | we may hold more inventory than is immediately required to compensate for potential component shortages or discontinuation.
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The occurrence of any of these or similar events would harm our business.





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





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





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





We expect that we will increasingly be subject
to license offers and infringement claims as the number of products and competitors in our market grows and the functionality of products overlaps. In this regard, in early 1999, and again in April 2000, we received written notices from Hybrid
Networks in which Hybrid claimed to have patent rights in certain technology. Hybrid requested that we review our products in light of 11 of Hybrids issued patents.





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





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




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




| |  |  | cease the manufacture, use and sale of infringing products; or
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| |  |  | expend significant resources to develop non-infringing technology.
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Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition.




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





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





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





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





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





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





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




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




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




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





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





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




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





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





Our management collectively own approximately 47% of our outstanding common stock. As a result,
these stockholders, acting together, will be able to control the outcome of all matters submitted for stockholder action, including:





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




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




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




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





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





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





| |  |  | actual or anticipated variations in our quarterly operating results or those of our competitors;
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| |  |  | announcements by us or our competitors of new products or technological innovations;
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| |  |  | introduction and adoption of new industry standards;
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| |  |  | changes in financial estimates or recommendations by securities analysts;
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| |  |  | changes in the market valuations of our competitors;
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| |  |  | announcements by us or our competitors of significant acquisitions or partnerships; and
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| |  |  | 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.




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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 fourth quarter of 2001, 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. 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 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.





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





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




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In May 2000, a committee chaired by the Director General of the Israeli Ministry of Finance
issued its report recommending a major reform in the Israeli tax system. The proposed tax reform, which could become effective in the near future and may include certain provisions with retroactive effect as of January 1, 2001, provides for material
changes to the current Israeli tax system. Some of the committees proposals may have adverse tax consequences for us and for certain of our stockholders. For example, the committee proposes to eliminate the existing initial tax exemption with
respect to income generated by any of our approved enterprise facilities. Because we cannot predict whether, and to what extent, the committees proposals, or any of them, will eventually be adopted and enacted into law, we and our stockholders
face uncertainties as to the potential consequences of these tax reform proposals.





In the past, we received grants from the
government of Israel for the financing of a portion of our research and development expenditures in Israel. The regulations under which we received these grants restrict our ability to manufacture products or transfer technology outside of Israel
for products developed with this technology. We believe that most of our current products are not based on Chief Scientist funded technology and therefore are not subject to this restriction.





It may be difficult enforce a U.S. judgment against us and our nonresident director and experts.





One of our directors and some of the experts named in this report are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States.
Therefore, it may be difficult to enforce a judgment obtained in the United States based upon the civil 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 March 31, 2002, we had cash, cash equivalents and short-term investments of $80.8 million. Substantially all of these
amounts consisted of corporate and government fixed income securities and money market funds that invest in corporate and government fixed income securities that are subject to interest rate risk. We place our investments with high credit quality
issuers and by policy limit the amount of the credit exposure to any one issuer.





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





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





Quantitative Interest Rate Disclosure As of March 31, 2002





If market interest rates were to increase on March 31, 2002 immediately and uniformly by 10%, the fair value of the portfolio would decline by
approximately $157,000 or approximately 0.24% of the total portfolio




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(approximately 0.19% of total assets). Assuming that the average yield to maturity on our portfolio at March 31, 2002
remains constant throughout the second quarter of 2002 and assuming that our cash, cash equivalents and short-term investments balances at March 31, 2002 remain constant for the duration of the second quarter of 2002, interest income for the second
quarter of 2002 would be approximately $873,000 million. Assuming a decline of 10% in the market interest rates at March 31, 2002, interest income for the second quarter of 2002 would be approximately $861,000 million, which represents a decrease in
interest income of approximately $12,000. 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 month ended March 31, 2002. These amounts are determined by
considering the impact of the hypothetical interest rates on the Companys cash equivalents and available-for-sale securities at March 31, 2002, over the remaining contractual lives.





PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





As we have previously
disclosed, on August 14, 2001, Har Hotzvim Properties Ltd. (Har Hotzvim) filed a claim against us and our subsidiary, Vyyo Ltd., in the Jerusalem, Israel, District Court, alleging that we and Vyyo Ltd. breached obligations under a lease
agreement and an amendment thereto between Vyyo Ltd. and Har Hotzvim. The lease agreement, as amended, relates to an approximately 93,000 square foot facility in Jerusalem, Israel that Vyyo Ltd. leased from Har Hotzvim. The complaint seeks damages
in the amount of NIS 10 million, or approximately $2.2 million; however, this amount was claimed for purposes of court fees, and the actual amount sought in Har Hotzvims statement of claim is NIS 37 million, or approximately $8.2 million. The
amount claimed may be increased during the proceedings, subject to the courts approval. Vyyo Inc. and Vyyo Ltd. have filed a statement of defense of Har Hotzvims claim. In addition to its claim and together therewith, Har Hotzvim has
filed a request for provisional attachment on the total amount of approximately $2.2 million. The court has partially approved Har Hotzvims request and issued an attachment order in an aggregate amount of NIS 3 million, or approximately
$643,000. Vyyo Ltd. filed a claim in July 2001 against Har Hotzvim, claiming that Har Hotzvims actions constitute a breach of its obligations under the lease agreement. The court was requested to order Har Hotzvim to reimburse Vyyo Ltd. for
its expenses in complying with the lease agreement in an aggregate amount of approximately NIS 8.7 million. In September 2001, the proceeding was converted from a declarative relief proceeding to a claim for damages.





Both Har Hotzvims and Vyyo Ltd.s claims are in abeyance as of the date of this report and certain intermediate proceedings are being
conducted before the court.





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





Item 2.Changes In Securities And Use Of Proceeds





On May
2, 2000, we completed an initial public offering of shares of our common stock, $0.0001 par value. The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (No.
333-96129). The Registration Statement was declared effective by the Securities and Exchange Commission on April 3, 2000. The initial public offering price was $13.50 per share 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 March 31, 2002, we used approximately $6.1 million of the net offering proceeds for purchases of property, plant and
equipment, approximately $2.4 million of the net proceeds for repayment of short term debt obligations, approximately $11.4 million of the net proceeds for repurchase of our common stock, and approximately $50.4 million of the net offering proceeds
for working capital.




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On September 19, 2000, we completed an underwritten public offering of our common stock. The
shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-45132). The Registration Statement was declared effective by the Commission on September 13, 2000. The
public offering price was $31.5625 per share 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 March 31,
2002, we used none of the net proceeds from this offering. Our temporary investments of the net proceeds from both of the offerings have been in cash, cash equivalents and investment grade, short-term interest bearing securities.





Item 3.Defaults Upon Senior Securities





None.





Item 4.Submission Of Matters To A Vote Of Security Holders





None.





Item 5.Other Information





On May 14, 2002, Vyyo Inc.
entered into a Share Exchange Agreement (the Exchange Agreement) with Shira Computers, Ltd., an Israeli privately held company (Shira), and certain of the shareholders of Shira, providing for the purchase by Vyyo of all of
the outstanding ordinary shares of Shira, for an aggregate of 500,000 shares of Vyyos common stock, valued at approximately $560,000, based on the closing price of Vyyos common stock on May 10, 2002 of $1.12 per share.





Under the terms of the Exchange Agreement, the shareholders of Shira will receive approximately 0.12 shares of Vyyo common stock for each
share of Shira common stock held by them, assuming all conditions to the closing are met and subject to certain adjustments in the event of changes in the number of outstanding shares of Shira prior to the closing. Vyyo also has agreed to provide a
bridge loan of approximately $600,000 to Shira. The share exchange is intended to qualify as a tax-free reorganization under United States law. Upon completion of the transaction, Shira will become a wholly-owned subsidiary of Vyyo. Consummation of
the share exchange will be subject to certain conditions, including the agreement of all of the Shira shareholders to exchange their shares, the restructuring of certain debt of Shira, and requisite regulatory approvals.





Shira provides web-enhanced software and e-commerce products for the prepress and publishing markets. Shira develops and provides digital prepress
workflow solutions which are web-based and include support for native PDF workflows. Shiras solution automates the prepress production process and facilitates efficient collaboration between customers and printers/tradeshops. Shira sells its
products through a direct sales force, dealers, VARs and reseller/OEM relationships with other vendors. Shira has developed and sold prepress software products for over ten years, and has an established customer base using its products. The prepress
software market was estimated by State Street Consultant Inc. to be a $3 billion per year global market, and it is highly fragmented. Over the last 18 months, Shira has developed a new web-based prepress workflow product and is in the initial stages
of a marketing launch for this product.





For the year ended December 31, 2001, Shira reported revenues of $2,431,000 and a net
loss of $881,000, and for the three months ended March 31, 2002, Shira reported revenues of $75,000 and a net loss of $298,000. As of March 31, 2002, Shira had a working capital deficiency of $4,503,000 and an accumulated deficit of $5,898,000.





Entities affiliated with Davidi Gilo, the Chairman of the Board and Chief Executive Officer of Vyyo and a significant
stockholder of Vyyo, will own an aggregate of approximately 50% of Shiras ordinary shares at the time of the closing of the transaction, assuming all closing conditions have been met. The entities affiliated with Mr. Gilo will indemnify Vyyo
against damages resulting from breaches of certain representations and warranties made by Shira and these entities in the Exchange Agreement, and the Vyyo shares issued to the Gilo entities will be held in escrow for one year to secure the indemnity
obligation.




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Item 6.Exhibits And Reports On Form 8-k





(a)    Exhibits





10.1

Share Exchange Agreement, dated as of May 14, 2002, by and among Vyyo Inc., Shira Computers, Ltd., The Gilo Family Partnership, L.P., Gilo Family Trust dated September 18,
1991, and the Shareholders of Shira Computers, Ltd.





(b)    Reports on Form 8-K.





No reports on Form 8-K were filed during the quarter ended March 31, 2002.




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SIGNATURE





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: May 14, 2002





VYYO INC.By:

/s/    DAVIDI GILODavidi Gilo, Chief Executive Officer and Interim Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)




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