##### Table of Contents

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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





(Mark One)


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




For the Quarterly Period Ended September 30, 2002





or





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




For the transition period
fromto





Commission File Number 0-30189





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VYYO INC.


(Exact name of registrant as specified in its charter)





Delaware

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

(I.R.S. Employer Identification Number)





20400 Stevens Creek Boulevard, 8thFloor, Cupertino, California

95014(Address of Principal Executive Offices)

(Zip Code)





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





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





As of September 30, 2002, there were 12,479,138 shares of Common Stock ($0.0001 par value) outstanding.





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##### Table of Contents

INDEX





VYYO INC.





Page No.PART I.    FINANCIAL INFORMATIONItem 1      Condensed Consolidated Financial Statements (Unaudited)Condensed consolidated balance sheets-September 30, 2002 and December 31, 2001

3Condensed consolidated statements of operations-three and nine months ended September 30, 2002 and September 30, 2001

4Condensed consolidated statements of cash flows-nine months ended September 30, 2002 and September 30, 2001

5Notes to condensed consolidated financial statements

6Item 2.    
Managements Discussion and Analysis of Financial Condition and Results of Operations

14Item 3.    
Quantitative and Qualitative Disclosures About Market Risk

32Item 4.    
Controls and Procedures

32PART II.    OTHER INFORMATIONItem 1.    
Legal Proceedings

33Item 2.    
Changes in Securities and Use of Proceeds

33Item 3.    
Defaults upon Senior Securities

34Item 4.    
Submission of Matters to a Vote of Security Holders

34Item 5.    
Other Information

34Item 6.    
Exhibits and Reports on Form 8-K

34SIGNATURES

35




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##### Table of Contents




Part I.    Financial Information





Item 1.Condensed Consolidated Financial Statements





VYYO INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(In Thousands)





September 30,


December 31,2002


2001(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
21,531


$
17,380Short-term investments


52,519



66,689Accounts receivable


625



729Inventory


87



693Other


825



601Total current assets


75,587



86,092PROPERTY AND EQUIPMENT, net


1,511



1,948GOODWILL


820IDENTIFIABLE INTANGIBLE ASSETS


2,832Total assets

$
80,750


$
88,040LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable


727



827Accrued liabilities


6,198



6,546Accrued restructuring liability


2,190



2,815Total current liabilities


9,115



10,188COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.0001 par value at amounts paid in and additional paid in capital; 200,000,000 shares authorized;
12,479,138 and 12,264,140 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively *


228,699



228,122Notes receivable from stockholders


(1,037
)Deferred stock compensation






(600
)Accumulated other comprehensive income


250



721Accumulated deficit


(156,277
)


(150,391
)Total stockholders equity


71,635



77,852$
80,750


$
88,040


---

|* |  | Shares issued and outstanding reflect the 1-for-3 reverse stock split. See note 1.
|- |  | ----------------------------------------------------------------------------------




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




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VYYO INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In Thousands Except Per Share Data)


(Unaudited)





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001NET REVENUES:Fixed broadband wireless

$
775


$
2,859


$
3,765


$
4,889Software products


151







151Total Net Revenues


926



2,859



3,916



4,889COST OF REVENUES:Fixed broadband wireless *


(89
)


3,207



1,089



13,264Software products


286







286Total Cost of Revenues


197



3,207



1,375



13,264GROSS PROFIT (LOSS)


729



(348
)


2,541



(8,375
)OPERATING EXPENSES:Research and development


1,338



2,740



3,296



12,670Selling and marketing


1,097



1,564



3,021



6,145General and administrative


1,305



895



3,825



5,478Charges for restructuring


(151
)


6,161



(151
)


11,562Charge for stock compensation






596



522



6,034Total operating expenses


3,589



11,956



10,513



41,889OPERATING LOSS


(2,860
)


(12,304
)


(7,972
)


(50,264
)INTEREST AND OTHER INCOME, net


499



1,236



2,086



4,425NET LOSS

$
(2,361
)

$
(11,068
)

$
(5,886
)

$
(45,839
)NET LOSS PER SHARE **Basic and diluted

$
(0.19
)

$
(0.90
)

$
(0.48
)

$
(3.74
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING **Basic and diluted


12,395



12,251



12,284



12,266


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|* |  | (1)  For the three and nine months ended September 30, 2002 includes a decrease of the warranty liability of $400 as a result of warranty expiration
for certain customers and due to the decrease in revenues.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2)  For the nine and three months ended September 30, 2001, includes $8,450 and $535, respectively, write-offs of excess inventory and purchase
commitments. See note 1.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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




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




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VYYO INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





Nine Months Ended September
30,2002


2001Cash flows from Operating Activities:Net loss

$
(5,886
)

$
(45,839
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


995



4,229Amortization and charge related to stock compensation


522



6,034Changes in assets and liabilities:Accounts receivable


153



1,255Other current assets


(177
)


1,226Inventories


606



3,950Accounts payable


(368
)


(3,270
)Accrued liabilities


(2,962
)


(2,141
)Restructuring liabilities


(625
)


4,797Net cash used in operating activities


(7,742
)


(29,759
)Cash flows from Investing ActivitiesPurchase of property and equipment


(67
)


(2,359
)Proceeds from sales and maturities of short-term investments


55,626



35,704Purchase of short-term investments


(41,927
)


(11,483
)Acquisition of Shira Computers Ltd.


(12
)Proceeds from sale of property and equipment


15



36Net cash provided by investing activities


13,635



21,898Cash flows from Financing ActivitiesRepurchase of common stock






(9,057
)Issuance of common stock


78



334Proceeds from short term credit


(820
)Loan to former Chief Executive Officer


(1,000
)Net cash used in financing activities


(1,742
)


(8,723
)Increase (decrease) in cash and cash equivalents


4,151



(16,584
)Cash and cash equivalents at beginning of year


17,380



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

$
21,531


$
17,407





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. 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.





Organization and Principles of Consolidation





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





The Companys consolidated financial statements
reflect the operations of Vyyo Inc. and its wholly-owned subsidiaries. Following the acquisition of Shira Computers Ltd. (Shira), the Companys results of operations consolidate the results of Shiras operations as of July 1,
2002. See note 3. As a result of the acquisition of Shira, the Companys results of operations for the three and nine months ended September 30, 2002 are not comparable to the results of the operations for the three and nine months ended
September 30, 2001. All material intercompany balances and transactions have been eliminated upon consolidation.





Reverse Stock Split





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





Use of Estimates





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





Inventory





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





During the year 2001, the Company recognized a write-down of excess inventory and purchase commitments of $8.45 million. The write-down was charged
to the cost of revenues. In the three and nine months ended September 30, 2002, inventory that was previously written-down to $0 by taking a charge of $233,000 and $900,000, respectively, was sold for the amount of $333,000 and $981,000,
respectively.




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##### Table of Contents



VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







Revenue Recognition





Fixed broadband wireless:    Net revenues are derived from sales of hubs and modems initially sold as a package to telecommunications service
providers and to system integrators, and in 2001 the Companys revenues were also derived from system integration products and services provided to telecommunications service providers. Revenues from all 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) collection of
payment is reasonably assured and the Company has no additional obligations. The Company accrues for estimated sales returns and exchanges and product warranty and liability costs upon recognition of product revenues.





Software Products:    Net revenues from Software Products (as defined in Note 3 below) are comprised of
software products and software license fees. Revenue allocated to software is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is probable. The Company
accrues for estimated product warranty and liability costs upon recognition of product revenues.





Loss per share





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





2.    Inventory





Inventory is comprised of the following:





September 30, 2002

December 31, 2001In thousandsRaw materials

$
1

$
25Work in process





109Finished goods


86


559$
87

$
693





3.    Acquisition





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




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VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







The purchase price consists of shares of the Companys common
stock, which are valued at approximately $540,000, based on the Companys average share price of $3.24, which was determined based on the closing price from May 10, 2002 to May 16, 2002, which includes two trading days prior to and two trading
days subsequent to the public announcement of the acquisition, and $60,000 of direct acquisition costs. The 83,499 shares acquired by the entities affiliated with Mr. Gilo had a value of approximately $270,537, based on this average share price.





The acquisition was accounted for using the purchase method under FAS 141. The purchase price was allocated to
those assets acquired and liabilities assumed based on the estimated fair value of those assets and liabilities as of June 30, 2002 (acquisition date). Identifiable intangible assets consist of acquired technology in the amount of
$2,743,000 and customer list in the amount of $348,000. Goodwill of $820,000 represents the excess of the purchase price over the fair-value of the net tangible and identifiable intangible assets acquired. In accordance with FAS 142, goodwill which
is related to Software Products is not amortized and will be tested for impairment at least annually. The results of Shiras operations are consolidated from July 1, 2002.





The following is a summary of the total purchase price for this acquisition as of the acquisition date, (in thousands):


Value of the Companys shares

$
540Acquisition costs


60Total purchase price

$
600Fair value of net tangible liabilities acquired

$
(3,311
)Identifiable intangible assets


3,091Goodwill


820$
600





Identifiable intangible assets are amortized over a period of three
years. Amortization of identifiable intangible assets acquired was $259,000, of which the accumulated amortization of acquired technology was $229,000 and customer list was $30,000, for the three and nine months ended September 30, 2002. The
amortization of identifiable intangible assets acquired is included in the cost of revenues.





Future amortization
expenses of identifiable intangible assets on a fiscal year basis are as follows:





September 30, 2002In thousands2002

$
2582003


1,0302004


1,0302005


514$
2,832




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VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







The following unaudited pro forma information presents a summary of
the results of the operations of the Company assuming the acquisition of Shira occurred at the beginning of the fiscal year for each period reported (in thousands except, per share amounts):





Three Months Ended September 30, 2001



Nine Months Ended September 30,2002


2001Net revenues

$
3,391


$
4,036


$
7,176Net loss

$
(11,401
)

$
(6,588
)

$
(47,007
)Net loss per shareBasic and diluted

$
(0.92
)

$
(0.53
)

$
(3.78
)Weighted average number of common shares outstandingBasic and diluted


12,417



12,395



12,432





4.    Accrued Liabilities





Accrued liabilities consist of the following:





September 30, 2002

December 31, 2001In thousandsCompensation and benefits

$
1,642

$
1,895Withholding tax


1,400


1,268Warranty


1,000


1,363Other


2,156


2,020$
6,198

$
6,546





|
|



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VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







5.    Accrued Restructuring liability





In 2001, the Company implemented a restructuring program to reduce operating expenses due to the dramatic and 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 remaining balance as of
September 30, 2002, relates to contractual obligations and to a legal claim with respect to facilities (see note 6). The restructuring charge, utilization is summarized as follows:





Cumulative restructuring charge in 2001

Balance as of December 31, 2001

Utilized in 2002

Adjustment In the three months
ended September 30, 2002

Balance as of September 30, 2002 To be utilizedIn thousandsFacilities

$
4,913

$
2,365

$
175

$


$
2,190Equipment


2,616











Employees severance and other related benefits


5,298


450


299


151


$
12,827

$
2,815

$
474

$
151

$
2,190





6.    Contingencies





Patent matter





In early 1999 and in April 2000, the Company received written notices from Hybrid Networks, Inc. (Hybrid), in which Hybrid claimed to have patent rights in certain technology and requested that the Company review
its products in light of twelve of Hybrids issued patents. The Company, with the advice of its legal counsel, believes that these patents are invalid or are not infringed by the Companys products. However, Hybrid or its successors 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.




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VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







Legal claims regarding alleged breach of leasing agreement





A dispute has arisen between the Company and its subsidiary, and Har Hotzvim Properties Ltd. (Har
Hotzvim) with respect to the compliance with a leasing agreement and an amendment thereto in which the Companys subsidiary leased office space from Har Hotzvim, at Har Hotzvim industrial zone in Jerusalem, Israel. Har Hotzvim alleges
that the Company and its subsidiary breached their obligations under the lease agreement. The Company has contested the claims against it on the basis that only the Companys subsidiary, not the Company, is a party to the lease agreement. 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 damages alleged by Har Hotzvim in its statement of claim, based on the claimed breach of the Companys and its subsidiarys obligations under the lease agreement, is NIS 37 million, or approximately $8.2 million.
Har Hotzvim may increase the claim amount subject to court approval, and in October 2002, Har Hotzvim applied to the court requesting an increase in the aggregate claim amount from NIS 10 million to NIS 25 million, or approximately $5.5 million. In
addition to its claim and together therewith, Har Hotzvim filed a request for a provisional attachment on the total amount of approximately $2.2 million. The court partially approved Har Hotzvims request and issued an attachment order in an
aggregate amount of NIS 3 million, or approximately $643,000. In connection with this dispute, the Companys subsidiary has also filed a statement of claim against Har Hotzvim, claiming that Har Hotzvim has breached its obligations under this
agreement.





Both the Companys subsidiarys and Har Hotzvims claims are in abeyance and at this
stage intermediate proceedings are being conducted before the court. The Company believes it has included an adequate provision in the financial statements to cover the $2.2 million claim; however, the Company has not made a provision in its
financial statements for the $5.5 million claim sought by Har Hotzvim or the entire potential $8.2 million claim.





7.    Former Chief Executive Officer separation agreement





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





8.    Comprehensive Loss





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





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001Net loss

$
(2,361
)

$
(11,068
)

$
(5,886
)

$
(45,839
)Unrealized gain (loss) on available-for-sale securities


56



233



(471
)


866Comprehensive loss

$
(2,305
)

$
(10,835
)

$
(6,357
)

$
(44,973
)




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VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







9.    Segment Reporting





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





Three Months Ended September 30,

Nine Months Ended September 30,2002

2001

2002

2001In thousandsNet revenues:Fixed broadband wireless

$
775

$
2,859

$
3,765

$
4,889Software Products


151





151Consolidated net revenues

$
926

$
2,859

$
3,916

$
4,889Loss from operations:Fixed broadband wireless

$
1,894

$
12,304

$
7,006

$
50,264Software Products


966





966Consolidated loss from operations

$
2,860

$
12,304

$
7,972

$
50,264





September 30, 2002

December 31, 2001In thousandsIdentifiable assets:Fixed broadband wireless

$
76,397

$
88,040Software Products


4,353Consolidated identifiable assets:

$
80,750

$
88,040





Sales to major customers:





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001Net revenues:Customer A

37
%

3
%

27
%

12
%Customer B

4
%

2
%

27
%

1
%Customer C




74
%

4
%

43
%




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##### Table of Contents



VYYO INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







9.    Recent Accounting Pronouncements





In June 2001, the FASB issued FAS 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 FAS No. 143 to have a material impact on the Companys financial position, results of operations, or cash flows.





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





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





10.    Subsequent Events





In October 2002, the Company agreed
to settle a dispute with another company based on a license and development agreement entered into between the Company and the other party in 1999, pursuant to which the Company had developed and licensed certain of the Companys technology to
the other company. Under the terms of this proposed settlement, the other company has agreed to pay to the Company $510,000, and the parties have agreed to release each other from all claims in connection with the license and development agreement.
The settlement is subject to the companies entering into a final settlement agreement.




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##### Table of Contents

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





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





Overview





Following the acquisition of Shira Computers Ltd. (Shira), as described below, our business is divided into two groups: Fixed broadband wireless and software products for the prepress and publishing industries
(Software Products). Commencing in 2001 and continuing through the present, the global telecommunications market, and in particular the fixed wireless broadband access market, has experienced a significant downturn, and we have
experienced a dramatic decrease in the sales of our products. In this environment, we determined that significant expenditures in our historical products and technology were not justified. As a result, we reduced our workforce by approximately 75%
during 2001, and, in doing so, we reduced our research and development expenses in the fixed wireless broadband to minimum levels. While we expect that the telecommunications market may recover over time, substantial uncertainty exists as to the
ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively address the market as it evolves with new and competitive products and technologies may be
limited due to, among other things, our limited research and development budget. While we are continuing to operate and develop our traditional wireless business, we are also exploring a variety of alternatives, including the restructuring,
licensing, sale or divestiture of a substantial portion or all of our current fixed wireless broadband technology or assets. In addition to our recent acquisition of Shira Computers Ltd. (Shira), a provider of software products for the
prepress and publishing markets, we also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. We have invested, and we expect that we will continue to invest,
significant time and resources searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.





We 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
$5.9 million for the nine months ended September 30, 2002. As of September 30, 2002, our accumulated deficit was approximately $156 million.





Our fixed broadband wireless group supplies broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed data connections to business and residential
subscribers. We sell these 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.





On May 14, 2002, Vyyo entered into a Share Exchange Agreement with Shira, an Israeli privately held company that provides software products for the prepress and
publishing markets. This transaction allows Vyyo to diversify its business by adding a different field of operation to its fixed wireless broadband operations. Shira employs approximately 35 employees as of September 30, 2002, and develops and
provides digital prepress workflow solutions which 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.




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





The purchase price consists of shares of Vyyos
common stock, which are valued at approximately $540,000, based on Vyyos average share price of $3.24, which was determined based on closing price from May 10, 2002 to May 16, 2002, which includes two trading days prior to and two trading days
subsequent to the public announcement of the acquisition, and $60,000 of direct acquisition costs. The 83,499 shares acquired by the entities affiliated with Mr. Gilo had a value of approximately $270,537, based on this average share price.





The acquisition was accounted for using the purchase method under FAS 141. The purchase price was allocated to
those assets acquired and liabilities assumed based on the estimated fair value of those assets and liabilities as of June 30, 2002 (acquisition date). Identifiable intangible assets consist of acquired technology in the amount of
$2,743,000 and customer list in the amount of $348,000. Goodwill of $820,000 represents the excess of the purchase price under the fair-value of the net tangible and intangible assets acquired. In accordance with the FAS 142, goodwill is not
amortized and will be tested for impairment at least annually. The results of Shiras operations are consolidated from July 1, 2002.





The following is a summary of the total purchase price of this acquisition as of the acquisition date, (in thousands):


Value of Vyyos shares

$
540Acquisition costs


60Total purchase price

$
600Fair value of net tangible liabilities acquired

$
(3,311
)Identifiable intangible assets


3,091Goodwill


820$
600





Identifiable intangible assets are amortized over a period of three
years. Amortization of identifiable intangible assets acquired was $259,000, of which the accumulated amortization of acquired technology was $229,000 and customer list was $30,000,for the three and nine months ended September 30, 2002. The
amortization of identifiable intangible assets acquired was included in the cost of revenues.




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Following the acquisition of Shira, our results of operations consolidate the results of Shiras operation as of
July 1, 2002. As a result of the acquisition of Shira, our results of operations for the third quarter of 2002 and for the first nine months of 2002 are not comparable to the results of the operations for the third quarter of 2001 and for the first
nine months of 2001. All material intercompany balances and transactions have been eliminated upon consolidation.





In December 2000, our board of directors approved a program to repurchase up to 1,333,333 shares of our common stock (as adjusted for our recent reverse stock split). Repurchases may be made from time to time on the open market at
prevailing market prices or in negotiated transactions off the market, subject to market conditions and at the discretion of management. We are under no obligation to purchase any or all of the shares under this repurchase program and may terminate
the program at any time. Any purchases would increase the ownership of our remaining stockholders, including Mr. Gilo, who beneficially owned approximately 5,562,658 shares of common stock as of October 17, 2002. As of September 30, 2002, we had
repurchased a total of 557,800 shares for approximately $11.3 million.





Critical Accounting Policies





We identified the most critical accounting principles upon which our financial status depends. We determined the critical principles by
considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policy in the interim period to be this related to legal proceedings with respect to the dispute with
Har Hotzvim described in the notes to the financial statements and elsewhere in this report.





In October 2002, Har
Hotzvim applied to the court requesting an increase in the aggregate claim amount from $2.2 million to approximately $5.5 million. We believe we have included an adequate provision in the financial statements to cover the $2.2 million. However we
have not made a provision in our financial statements for the corrected $5.5 million claim sought by Har Hotzvim or for the entire potential of $8.2 million claim. We believe the amount we have reserved at this time is adequate under the current
circumstances and will re-evaluate the amount of our reserve to address our exposure subject to such other developments as may occur in the dispute.





Results of Operations





Net Revenues.





Fixed broadband wireless:    Net revenues are derived from sales of hubs and modems initially sold as a package
to telecommunications service providers and to system integrators, and in 2001 net revenues were also derived from system integration products and services provided to telecommunications service providers. Revenues from all 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)
collection of payment is reasonably assured and we have no additional obligations. We accrue for estimated sales returns and exchanges and product warranty and liability costs upon recognition of product revenues.





Software Products:    Net revenues from Software Products are comprised of software products and software
license fees. Revenue allocated to software is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is probable. We accrue for product estimated warranty and
liability costs upon recognition of product revenues.





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





Net revenues decreased by 68% to $926,000 in the third quarter of 2002 from $2.9 million in the third quarter of 2001, and
decreased by 20% to $3.9 million in the first nine months of 2002 from $4.9 million in the first nine months of 2001. Net revenues in the third quarter and in the first nine months of 2002 included $151,000 from Software Products. The decrease in
revenues in the third quarter of 2002 primarily reflects a reduction of capital




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spending and further tightening of financial markets in the telecommunication industry, which has
reduced our potential customers ability to secure financing and purchase equipment, and, to a lesser extent, also reflects delays in allocation of the 3.5 GHz frequency in China to fixed wireless applications. Net revenues include revenues
from sales of inventory that was previously written down to $0 in 2001 of approximately $333,000 in the third quarter of 2002 and approximately $981,000 in the first nine months of 2002.





Cost of Revenues.





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





Cost of revenues decreased in the third quarter of 2002 to $197,000 from $3.2 million in the third
quarter of 2001, and decreased in the first nine months of 2002 to $1.4 million from $13.3 million in the first nine months of 2001. Cost of revenues in the third quarter of 2002 included approximately $286,000 from Software Products. The decrease
in cost of revenues and the increase in the gross margin in the third quarter and in the first nine months of 2002 was attributable primarily to: (1) decrease of the warranty liability by $400,000 as a result of warranty expiration for certain
customers and due to the decrease in revenues, (2) charges in the third quarter of 2001 of approximately $535,000 and the first nine months of 2001 of approximately $8.5 million, for excess inventory and purchase commitments, due to the dramatic
downturn in the global telecommunications industry and to the decrease in orders for and sales of our products, and (3) deducting $233,000 from the cost of revenues in the third quarter of 2002 and $900,000 from the cost of revenues in the first
nine months of 2002, for sales of inventories during these periods that were previously written down to $0 in 2001.





The decrease in cost of revenues was partially offset by the cost of revenues from Software Products and by amortization of identifiable intangible assets. The amortization of identifiable tangible assets acquired was $259,000, the
accumulated amortization of acquired technology was $229,000 and customer list was $30,000, for the three and nine months ended September 30, 2002.





We believe that cost of revenues will significantly increase, and gross margins will significantly decrease, in the future when and if the products we sell are not taken from inventory that has been
previously written down.





Research and Development Expenses.





Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development
activities. Substantially all of our wireless research and development activities are carried out in our facility in Jerusalem, Israel, and our software research and development activities in Shira are carried out in our facility in Kfar Saba,
Israel. These expenses are charged to operations as incurred. Our research and development expenses decreased to $1.3 million in the third quarter of 2002 from $2.7 million in the third quarter of 2001, and to $3.3 million in the first nine months
of 2002 from $12.7 million in the first nine months of 2001. Research and Development expenses included approximately $359,000 from Software Products in the third quarter of 2002. The decrease in expenses was 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.





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 third quarter of 2002 from $1.6 million in the third quarter of 2001, and to $3 million in the first nine months of 2002 from $6.1 million in the first nine months of 2001. Sales and marketing
expenses included approximately $376,000 from Software Products in the third quarter of 2002. 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




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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, travel, legal, human resources and administration. General and administrative expenses increased to $1.3 million in the third quarter of 2002 from $895,000 in the third quarter of 2001, and decreased
to $3.8 million in the first nine months of 2002 from $5.5 million in the first nine months of 2001. General and administrative expenses included approximately $95,000 from Software Products in the third quarter. The increase in general and
administrative expenses in the third quarter of 2002 was primarily due to an increase in director and officer insurance costs, and the cancellation of the bonus program for management in the third quarter of 2001 which decreased expenses by
approximately $253,000. The decrease in the first nine months of 2002 was primarily due to reduction in compensation related expenses resulting from reductions in our workforce in the second and third quarters of 2001. General and administrative
expenses also included expenses of $583,000 for the first nine months of 2002, paid to an unaffiliated third party management company in connection with several charters of an aircraft for business travel purposes. While we chartered the aircraft
directly from the management company, the chartered aircraft is leased by Harmony Management, Inc., of which Davidi Gilo and his wife are the sole shareholders. Payments made by us to the management company for the aircraft charters were ultimately
paid to Harmony Management, after deductions for certain operating costs and charter management fees. At the instruction of Harmony Management, the hourly rate charged by the management company for these charters was substantially less than the
standard rate charged by the management company for similar charters to other unaffiliated parties.





Restructuring Charges.





Through September 30, 2002, we have completed our restructuring
obligations for employees severance and other related benefits, and in the third quarter of 2002 we recorded a positive adjustment of $151,000, reducing the restructuring liability. The remaining balance as of September 30 2002 relates to
facilities contractual obligations and a legal claim. In addition to this adjustment, in 2002, we also utilized $474,000 from the restructuring expenses that were accrued in 2001. In 2001, we implemented a restructuring program to reduce operating
expenses due to the dramatic and continuing slowdown in the telecommunications sector and the general economy. In connection with this restructuring, we recorded charges of $12.8 million. These charges are costs related to excess facilities,
abandoned equipment and employees severance and other, related benefits. The restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of our workforce. The excess facilities costs consist of rental
payments for unused premises under current agreements and costs associated with the abandonment of facilities, including lease payments and leasehold improvements invested in these premises and costs associated with the related legal claim against
us. Restructuring charges of $6.2 million recorded in the third quarter of 2001 relate mostly to excess facilities, abandoned equipment and employees severance and other, related benefits.





Charge for Stock Based Compensation.





Charge for stock based 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 charges related to stock compensation for the third quarter of 2002 were $0 and for the third quarter of 2001 were $596,000. Amortization and deferred compensation charges for the
first nine months of 2002 were $522,000, consisting of charges of $674,000, less a decrease in compensation of $152,000 related to an accounting variable plan in the first quarter of 2002. As of September 30, 2002, unamortized deferred compensation
related to options issued through the completion of the initial public offering amounted to $0.




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Interest and Other Income, Net.





Interest and other income, include interest and investment income, mainly from our cash and short-term investment balances from proceeds
from our initial and follow-on public offerings effected in 2000. Interest income decreased to $499,000 in the third quarter of 2002 compared to $1.2 million in the third quarter of 2001, and decreased to $2 million in the first nine months of 2002
from $4.4 million in the first nine months of 2001. We expect that our interest income will continue to decrease due to decreasing cash balances and reduced interest rates in financial markets.





Income Taxes.





As of
December 31, 2001, we had approximately $60 million of Israeli net operating loss carryforwards, $4.7 million of United States federal net operating loss carryforwards, and $4.7 million of state net operating loss carryforwards. The Israeli net
operating loss carryforwards have no expiration date and have not been recorded as tax assets because the losses are expected to be utilized during a tax exempt period. The United States federal net operating loss carryforwards expire in various
amounts between the years 2011 and 2021. The state net operating loss carryforwards expire in various amounts between the years 2004 and 2006. We have provided a full valuation allowance against our United States federal and state deferred tax
assets as the future realization of the tax benefit is not sufficiently assured.





Liquidity And Capital
Resources.





As of September 30, 2002, we had $74 million of cash, cash equivalents and short-term investments.
In the first nine months of 2002, cash used in operations was $7.7 million, comprised of our net loss of $5.9 million and changes in other working capital accounts of $3.4 million, and partially offset by a non-cash charges of $522,000 for deferred
stock compensation charges and $995,000 for depreciation and amortization. In the first nine months of 2001, cash used in operations was $29.8 million, comprised of our net loss of $45.8 million, partially offset by non-cash charges of $10.3 million
for stock compensation charges, depreciation and asset write-down and changes in working capital accounts of $5.8 million.





Investing activities in the first nine months of 2002, excluding purchases and proceeds from short-term investments, amounted to a net outflow of approximately $64,000 for investments in property and equipment and in the purchase of
Shira and in property and equipment partially offset by proceeds from sale of property and equipment amounted to approximately $15,000. Investing activities in the first nine months of 2001, excluding purchases and proceeds from short-term
investments, amounted to approximately $2.3 million for investments in property and equipment.





Financing
activities in the first nine months of 2002 resulted in a net outflow of approximately $1.7 million from a loan to our former Chief Executive Officer and from proceeds from short term debt, partially offset by proceeds from stock option exercises
and purchases of stock under the employee stock purchase plan. Financing activities in the first nine months of 2001 resulted in a net outflow of $8.7 million due to stock repurchases in the amount of $9.1 million, partially offset by proceeds from
stock option exercises.





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




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New Accounting Pronouncements





In June 2001, the FASB issued FAS 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 FAS No. 143 to have a material impact on our financial position, results of operations, or cash flows.





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





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





CERTAIN FACTORS
THAT MAY AFFECT FUTURE RESULTS





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





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





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





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





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





In addition, commencing in 2001 and continuing to the present, the market for telecommunications
equipment significantly declined, which severely adversely affected the entire telecommunications industry,




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





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





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





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





Shiras new product, Xpressi, is an advanced workflow solution, and Shiras business prospects
depend in large part on the success of this product in the market. However, to date, Shira has only begun to install this product with customers, and there are therefore only a very limited number of references for this product with which
prospective customers can inquire. In addition, the success of Xpressi will depend on its ability to function effectively on many different customers systems. Since Xpressi is new and currently installed with only a few customers, Shira may
have difficulty in effectively integrating the product into customers systems such that the product functions properly with each customers system. In addition, the printing prepress market is conservative and slow to adopt new
technologies and methodologies. Shira is also generally considered in the industry as a small company offering software shelf products rather than as a provider of integrated workflow solutions. As a result of these factors, Shira may be unable to
convince customers to adopt this product. If Shira is unable to sell Xpressi on a large scale, Shiras business and prospects would be substantially harmed.





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





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





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 $5.9 million in the first nine
months of 2002 and $45.8 million in the first nine months of 2001. As of September 30, 2002, our accumulated deficit was approximately $156 million. In response to the significant decline in our business and revenues which began in 2001 and has
continued through the present, we have decreased our operating expenses in our wireless business; however, our expenses will continue to be significantly greater than our gross margin on revenues for the




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foreseeable future. Our revenues and gross margins may not grow or even continue at their current level
and may decline even further. If our revenues do not rapidly increase or if our gross margins do not increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.





In addition, our new subsidiary Shira Computers Ltd. incurred net losses of $777,000 in the third quarter of 2002 and had a
shareholders deficit as of September 30, 2002 of $4.1 million. We anticipate that Shira will continue to incur net losses for the foreseeable future.





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





During 2001, the global telecommunications market, and in particular the fixed wireless broadband access market, experienced a significant downturn, and we experienced
a dramatic decrease in the sales of our products and the adoption of our technology which has continued through the present. In this environment, we determined that significant expenditures in our historical products and technology was not
justified. As a result, we reduced our workforce by approximately 75% during 2001. As a result of these reductions, we have reduced our research and development expenses to what we believe are minimum levels. While we expect that the
telecommunications market may recover over time, substantial uncertainty exists as to the ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively
address the market as it evolves with new and competitive products and technologies may be limited due to, among other things, our limited research and development budget. While we are continuing to operate and develop our traditional wireless
business, we also expect to explore a variety of alternatives, including potential restructuring or the licensing, sale or divestiture of a substantial portion or all of our technology or assets. In addition to our recent acquisition of Shira
Computers Ltd., we also expect to explore alternatives relating to the licensing, purchase or acquisition of other products, technology, assets or businesses. We have invested, and we expect that we will continue to invest, significant time and
resources searching for and investigating new business opportunities. We may not be able to successfully effect any of these alternatives on a timely basis or at all.





The 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 nine months of 2002, Wuhan Research Institute of Posts and
Telecommunication accounted for approximately 27% of our revenues (28% of our wireless revenues), Dalager Engineering Inc. accounted for approximately 27% of our revenues (28% of our wireless revenues) and Andrew Corporation accounted for
approximately 13% of our revenues (14% of our wireless revenues). In 2001, WorldCom Broadband Solutions, Inc. accounted for approximately 57% of our revenues, and Wuhan Research Institute of Posts and Telecommunication accounted for approximately 9%
of our revenues. We have not received any new significant orders from WorldCom, nor do we expect them to continue to deploy a significant number of cities in the foreseeable future. We expect that we will continue to depend on a limited number of
customers for a substantial portion of our revenues in future periods. The loss of a major customer could seriously harm our ability to sustain revenue levels, which would seriously harm our operating results. In addition, many of our customers are
dependent on obtaining funding for their deployments. The continued inability of our customers to obtain such funding will adversely affect their deployments, which would adversely affect our business.





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





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




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little or no penalty for cancellation or rescheduling, and its customers are not obligated to purchase a
minimum number of Shiras products.





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





We recently acquired Shira Computers Ltd., a provider of software products for the prepress and publishing markets. We also continue to explore investments in or acquisitions of other companies, products or technologies,
including companies or technologies that are not complementary or related to our current wireless broadband access business. We have no experience in the printing and graphic arts industry, and we may therefore be unsuccessful in operating Shira as
a profitable business. In addition, we may have difficulty integrating Shiras or other companies personnel, operations, products and technologies into our current business. It also may be difficult to manage Shira since its management is
based on the East Coast of the United States. These difficulties may disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, the anticipated benefits of our acquisition of Shira or any other
acquisition may not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to identifiable intangible assets and impairment of
goodwill and the incurrence of large and immediate write-offs, any of which could seriously harm our business. In addition, we expect that we will expend significant resources in searching for and investigating new business opportunities, and may be
unsuccessful in acquiring new businesses.





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





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





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





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





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




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




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




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




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




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




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




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



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





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





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





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





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





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





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





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





Our systems may contain undetected defects or errors. This may result either from defects in components supplied by third parties or from errors or defects in our software
or hardware that we have failed to detect. We have in the past experienced, and may experience from time to time in the future, defects in new or enhanced products and systems after commencement of commercial shipments, or defects in deployed
systems. Our




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





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





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





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





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




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





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





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




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




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




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




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




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





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





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





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





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.




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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 reduced our fixed broadband wireless 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 32% of our revenues in the
first nine months of 2002 and approximately 16% of our revenues in 2001. We expect that international sales may account for a substantial portion of our revenues in future periods. In addition, we maintain research and development facilities in
Israel. Our reliance on international sales and operations exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:





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




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




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




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




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




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




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





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





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





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





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





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




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





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




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




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




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




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





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





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





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





A customers decision to purchase our fixed broadband wireless systems typically
involves a significant technical evaluation, formal internal procedures associated with capital expenditure approvals and testing and acceptance of new systems that affect key operations. For these and other reasons, the sales cycle associated with
our systems can be lengthy and subject to a number of significant risks over which we have little or no control. Because of the growing sales cycle and the likelihood that we may rely on a 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




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expenditure needs for at least the next 12 months. After that, we may need to raise additional funds for a number of uses, including:





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




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




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




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





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.





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





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





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




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





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





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





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





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





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





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




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




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




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




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





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





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





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




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




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




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




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




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




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



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





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





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





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





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





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




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




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




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




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




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




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





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





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




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Item 3.Quantitative and Qualitative Disclosures about Market Risk





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





As of September 30, 2002, we had cash, cash equivalents and short-term investments of $74 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
September 30, 2002





If market interest rates were to increase on September 30, 2002 immediately and uniformly
by 10%, the fair value of the portfolio would decline by approximately $93,000 or approximately 0.15% of the total portfolio (approximately 0.12% of total assets). Assuming that the average yield to maturity on our portfolio at September 30, 2002
remains constant throughout the fourth quarter of 2002 and assuming that our cash, cash equivalents and short-term investments balances at September 30, 2002 remain constant for the duration of the fourth quarter of 2002, interest income for the
fourth quarter of 2002 would be approximately $654,000. Assuming a decline of 10% in the market interest rates at September 30, 2002, interest income for the fourth quarter of 2002 would be approximately $638,000, which represents a decrease in
interest income of approximately $16,000. This decrease in interest income would result in a decrease of the same amount to net income and cash flows from operating activities for the fourth quarter of 2002. These amounts are determined by
considering the impact of the hypothetical interest rates on Vyyos cash equivalents and available-for-sale securities at September 30, 2002, over the remaining contractual lives.





Item 4.Controls and Procedures





(a)  Evaluation of Disclosure Controls and
Procedures. Vyyos Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Vyyos disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, Vyyos disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Vyyo (including its consolidated subsidiaries) required to be included in Vyyos reports filed
or submitted under the Exchange Act.





(b)  Changes in Internal Controls. Since the Evaluation Date,
there have not been any significant changes in Vyyos internal controls or in other factors that could significantly affect such controls.




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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 our subsidiary, Vyyo Ltd., and us in the Jerusalem, Israel, District Court, alleging that Vyyo Ltd. and we breached obligations under a lease agreement and an amendment thereto
between Vyyo Ltd. and Har Hotzvim. Vyyo Inc. has contested the claims against it on the basis that it is not a party to the lease agreement. 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, and in October 2002, Har Hotzvim applied to the court requesting an
increase in the aggregate claim amount from NIS 10 million to NIS 25 million, or approximately $5.5 million. 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. In connection with this dispute, Vyyo Ltd. also filed a claim in July 2001 against Har Hotzvim, claiming that Har Hotzvims actions constitute a breach of its obligations under the lease agreement. The court was
requested to order Har Hotzvim to reimburse Vyyo Ltd. for its expenses in complying with the lease agreement in an aggregate amount of approximately NIS 8.7 million. In September 2001, the proceeding was converted from a declarative relief
proceeding to a claim for damages.





Both Har Hotzvims and Vyyo Ltd.s claims are in abeyance as of the
date of this report and intermediate proceedings are being conducted before the court. We believe we have included an adequate provision in the financial statements to cover the $2.2 million claim; however, we have not made provision in our
financial statements for the $5.5 million claim sought by Har Hotzvim or the entire potential $8.2 million claim.





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





Item 2.Changes In Securities and Use of Proceeds





Issuance of Shares in Connection with the Acquisition
of Shira Computers Ltd.





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





Entities affiliated with Davidi Gilo, the Chairman of the Board and Chief Executive Officer of Vyyo and a significant
stockholder of Vyyo, owned an aggregate of approximately 50% of Shiras ordinary shares immediately




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





Public Offerings in 2000





On May 2, 2000, we completed an initial public offering of shares of our common stock, $0.0001 par value. The shares of common stock sold in the offering were registered
under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-96129). The Registration Statement was declared effective by the Securities and Exchange Commission on April 3, 2000. The initial public offering price was $13.50 per
share (not taking into account the 1-for-3 reverse stock split effected in August 2002) for an aggregate initial public offering of $104.8 million. After deducting the underwriting discounts and commissions of $7.3 million and the offering expenses
of approximately $2.6 million, the net proceeds to us from the offering were approximately $94.9 million.





From
April 3, 2000, until September 30, 2002, we used approximately $6.2 million of the net offering proceeds for purchases of property, plant and equipment, approximately $3.2 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 $51.3 million of the net offering proceeds for working capital.





On September 19, 2000, we completed an underwritten public offering of our common stock. The shares of common stock sold in the offering were registered under the
Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-45132). The Registration Statement was declared effective by the Commission on September 13, 2000. The public offering price was $31.5625 per share (not taking into account the
1-for-3 reverse stock split effected in August 2002) for an aggregate public offering price of the shares we sold of $55.2 million. After deducting the underwriting discounts and commissions of $2.9 million and the offering expenses of approximately
$1.0 million, the net proceeds to us from the offering were approximately $51.3 million.





From September 13, 2000,
until September 30, 2002, we used none of the net proceeds from this offering. Our temporary investments of the net proceeds from both of the offerings have been in cash, cash equivalents and investment grade, short-term interest bearing securities.





Item 3.Defaults Upon Senior Securities





None.





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





None.





Item 5.Other Information





None.





Item 6.Exhibits and Reports on Form 8-k





(a)  Exhibits





99.1

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





(b)  Reports on Form 8-K





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


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SIGNATURES





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








VYYO INC.By:

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








By:

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





Date: November 4, 2002




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I, Davidi Gilo, certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Vyyo Inc. (the registrant);





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





b)  evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;





5.  The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal
controls; and





6.  The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





/s/    DAVIDI GILODavidi Gilo, Chief Executive
Officer





Date: November 4, 2002




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I, David Aber, certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Vyyo Inc. (the registrant);





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





b)  evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;





5.  The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal
controls; and





6.  The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





/s/    DAVID ABERDavid Aber, Chief Financial
Officer





Date: November 4, 2002




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