** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM10-Q**

** **

**(Mark One)**

** **

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

** **

**For the quarterly period ended**

** **

**or**

** **

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

** **

**For the transition period from January 1, 2007 toMarch 31, 2007**

** **

**Commission File Number000-30189**

** **

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**VYYOINC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                  | ** ** | **94-3241270**         |
|-----------------------------------------------|------------|------------------------|
| (State or other  jurisdiction of              |       | (I.R.S. Employer       |
| incorporation or  organization)               |       | Identification Number) |
|                                          |       |                   |
| **6625  The Corners Parkway, Suite 100** | ** ** | ** **             |
| **Norcross,  Georgia**                        | ** ** | **30092**              |
| (Address of Principal  Executive Offices)     |       | (Zip Code)             |

 

Registrant’s telephone number, including area code **(678) 282-8000**

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act (Check one):

 

| Large accelerated filer  o |   | Accelerated filer o |   | Non-accelerated filer x |
|----------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o No x

 

As of December 14, 2007, there were 18,659,720shares of Common Stock outstanding.

 

 

 

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**INDEX**

**VYYO INC.**

 
| ** **                                                                                                | **Page No.**                                                                                                             |
|-----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION                                                                        | 3                                                                                                                        |
|                                                                                                      |                                                                                                                     |
| Item 1. Condensed  Consolidated Financial Statements                                                 | 3                                                                                                                        |
|                                                                                                      |                                                                                                                     |
|                                                                                                      | Condensed Consolidated Balance  Sheets at March 31, 2007 and December 31, 2006                                 | 3 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Condensed Consolidated  Statements of Operations for the Three Months Ended March 31, 2007 and  March 31, 2006 | 4 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2007 and  March 31, 2006 | 5 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Notes to Condensed  Consolidated Financial Statements                                                                    | 6 |
|                                                                                                      |                                                                                                                     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 21                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  | 30                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 4.  Controls and Procedures                                                                     | 30                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| PART II. OTHER  INFORMATION                                                                          | 31                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 1A. Risk Factors                                                                                     | 31                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 | 45                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 6. Exhibits                                                                                     | 46                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| SIGNATURES                                                                                                | 47                                                                                                                       |

 

 

 

2

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** **

**PART I.** FINANCIAL INFORMATION

**Item 1.**                          CondensedConsolidated Financial Statements

** **

**Vyyo Inc.**

**Consolidated Balance Sheets**

**(In thousands of U.S. $, except sharedata)**

 
| ** **                                                                                                                                                                                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current Assets:**                                                                                                                                                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                        | 24,134     |                        | $          | 7,416 |   |
| Short-term  investments                                                                                                                                                                                       |       | 7,020                    |       | 11,272                      |       |
| Accounts  receivable trade, net:                                                                                                                                                                              |       |                     |       |                        |       |
| Related party  (note 3)                                                                                                                                                                                       |       | —                   |       | 991                         |       |
| Other                                                                                                                                                                                                         |       | 468                      |       | 194                         |       |
|                                                                                                                                                                                                          |       | 468                      |       | 1,185                       |       |
| Inventory, net  (note 2)                                                                                                                                                                                      |       | 2,320                    |       | 2,362                       |       |
| Other                                                                                                                                                                                                         |       | 923                      |       | 996                         |       |
| **Total  Current Assets**                                                                                                                                                                                     |       | 34,865                   |       | 23,231                      |       |
| **Long-Term Assets:**                                                                                                                                                                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Restricted cash  (note 4)                                                                                                                                                                                     |       | 5,000                    |       | 5,000                       |       |
| Property and  equipment, net                                                                                                                                                                                  |       | 1,662                    |       | 1,676                       |       |
| Employee rights  upon retirement funded (note 6)                                                                                                                                                              |       | 1,221                    |       | 1,168                       |       |
| Debt issuance  costs, net                                                                                                                                                                                     |       | 150                      |       | 1,074                       |       |
| **TOTAL  ASSETS**                                                                                                                                                                                             |       | $                        | 42,898     |                        | $          | 32,149 |   |
|                                                                                                                                                                                                          |       |                     |       |                        |       |
| **LIABILITIES AND CAPITAL DEFICIENCY**                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current Liabilities:**                                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Accounts payable                                                                                                                                                                                              |       | $                        | 1,349      |                        | $          | 1,719 |   |
| Accrued  liabilities (note 5)                                                                                                                                                                                 |       | 8,140                    |       | 7,877                       |       |
| Deferred  revenues-related party (note 3)                                                                                                                                                                     |       | 3,679                    |       | 3,795                       |       |
| **Total  Current Liabilities**                                                                                                                                                                                |       | 13,168                   |       | 13,391                      |       |
|                                                                                                                                                                                                          |       |                     |       |                        |       |
| **Long-Term Liabilities:**                                                                                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Promissory note  (note 4)                                                                                                                                                                                     |       | 5,401                    |       | 5,078                       |       |
| Senior secured  note (note 7)                                                                                                                                                                                 |       | —                   |       | 5,085                       |       |
| Convertible note  (note 7)                                                                                                                                                                                    |       | 35,000                   |       | 10,097                      |       |
| Liability for  employee rights upon retirement (note 6)                                                                                                                                                       |       | 2,345                    |       | 2,111                       |       |
| **Total  Liabilities**                                                                                                                                                                                        |       | 55,914                   |       | 35,762                      |       |
| **Capital Deficiency:**                                                                                                                                                                                       | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Preferred stock, $0.001 par value; 5,000,000 shares  authorized, none issued                                                                                                                                  |       | —                   |       | —                      |       |
| Common stock,  $0.0001 par value and paid in capital; 50,000,000 shares authorized,  18,316,231 and 18,114,031 shares issued and outstanding at March 31,  2007 and December 31, 2006, respectively |       | 262,600                  |       | 260,966                     |       |
| Accumulated other comprehensive loss                                                                                                                                                                          |       | (1                       | )          | (3                          | )          |
| Accumulated deficit                                                                                                                                                                                           |       | (275,615                 | )          | (264,576                    | )          |
| **Total  Capital Deficiency**                                                                                                                                                                                 |       | (13,016                  | )          | (3,613                      | )          |
| **TOTAL LIABILITIES AND CAPITAL DEFICIENCY**                                                                                                                                                                  |       | $                        | 42,898     |                        | $          | 32,149 |   |

 

*The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.*

 

 

 

3

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**Vyyo Inc.**

**Condensed ConsolidatedStatements of Operations**

**(In thousands of U.S. $, except pershare data)**

**(Unaudited)**

 
| ** **                                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **REVENUES**                                                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues (note  10)                                                                             |       | $                                                | 462        |   | $ | 569 |   |
| Revenues from  related party (notes 3 and 10)                                                   |       | 161                                              |       | 1,800 |   |
|                                                                                            |       |                                             |       |   |   |
| **TOTAL REVENUES**                                                                              |       | 623                                              |       | 2,369 |   |
| **COST OF REVENUES**                                                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cost of products  sold                                                                          |       | 618                                              |       | 318 |   |
| Cost of products  sold, related party                                                           |       | 80                                               |       | 1,492 |   |
| **Total  Cost of Revenues**                                                                     |       | 698                                              |       | 1,810 |   |
| **GROSS PROFIT (LOSS)**                                                                         |       | (75                                              | )          | 559 |   |
|                                                                                            |       |                                             |       |   |   |
| **OPERATING EXPENSES**                                                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Research and  development                                                                       |       | 2,868                                            |       | 2,461 |   |
| Sales and  marketing                                                                            |       | 1,881                                            |       | 2,643 |   |
| General and  administrative                                                                     |       | 2,047                                            |       | 3,009 |   |
|                                                                                            |       |                                             |       |   |   |
| **Total  Operating Expenses**                                                                   |       | 6,796                                            |       | 8,113 |   |
| ** **                                                                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **OPERATING LOSS**                                                                              |       | (6,871                                           | )          | (7,554 | ) |
| **FINANCIAL INCOME**                                                                            |       | 244                                              |       | 155 |   |
| **FINANCIAL EXPENSES**(consists primarily of expenses for  extinguishment of debt, note 7) |       | (4,162                                           | )          | (424 | ) |
|                                                                                            |       |                                             |       |   |   |
| **LOSS BEFORE INCOME TAXES**                                                                    |       | (10,789                                          | )          | (7,823 | ) |
| **INCOME TAX**                                                                                  |       | (250                                             | )          | (157 | ) |
| **LOSS FOR THE PERIOD**                                                                         |       | $                                                | (11,039    | ) | $ | (7,980 | ) |
|                                                                                            |       |                                             |       |   |   |
| **LOSS PER SHARE —**basic and diluted                                                      |       | $                                                | (0.61      | ) | $ | (0.50 | ) |
|                                                                                            |       |                                             |       |   |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING**                                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Basic and  diluted                                                                              |       | 18,095                                           |       | 15,859 |   |

 

*The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.*

 

 

 

4

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**Vyyo Inc.**

**Condensed Consolidated Statements ofCash Flows**

**(In thousands of U.S. $)**

**(Unaudited)**

 
| ** **                                                                                                                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Loss for the period                                                                                                                    |       | $                                                      | (11,039    | ) | $ | (7,980 | ) |
| Adjustments to reconcile loss to net cash used in  operating activities:                                                               |       |                                                   |       |   |   |
| Income and  expenses not involving cash flows:                                                                                         |       |                                                   |       |   |   |
| Depreciation and  amortization                                                                                                         |       | 218                                                    |       | 229 |   |
| Accretion and  amortization of financing instruments, net                                                                              |       | 3,715                                                  |       | 365 |   |
| Stock-based  compensation, net                                                                                                         |       | 886                                                    |       | 1,981 |   |
| Capital gain on  sales of property and equipment                                                                                       |       | (4                                                     | )          | — |   |
| Decrease  (increase) in assets and liabilities:                                                                                        |       |                                                   |       |   |   |
| Accounts  receivable — related party                                                                                              |       | 991                                                    |       | — |   |
| Accounts  receivable — other                                                                                                      |       | (274                                                   | )          | 164 |   |
| Other current  assets                                                                                                                  |       | 73                                                     |       | (29 | ) |
| Inventory                                                                                                                              |       | 42                                                     |       | 987 |   |
| Accounts payable                                                                                                                       |       | (370                                                   | )          | (379 | ) |
| Accrued  liabilities                                                                                                                   |       | 342                                                    |       | 217 |   |
| Deferred  revenues — related party                                                                                                |       | (116                                                   | )          | 57 |   |
| Liability for  employee rights upon retirement                                                                                         |       | 234                                                    |       | 301 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Net cash used in operating activities                                                                                                  |       | (5,302                                                 | )          | (4,087 | ) |
|                                                                                                                                   |       |                                                   |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                                                               | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                                                                     |       | (435                                                   | )          | (34 | ) |
| Purchase of short-term investments                                                                                                     |       | (3,400                                                 | )          | (1,000 | ) |
| Proceeds from sales and maturities of short-term  investments                                                                          |       | 7,654                                                  |       | 4,739 |   |
| Proceed from sale of property and equipment                                                                                            |       | 6                                                      |       | — |   |
| Contributions to severance pay funds                                                                                                   |       | (53                                                    | )          | (31 | ) |
|                                                                                                                                   |       |                                                   |       |   |   |
| Net cash provided by investing activities                                                                                              |       | 3,772                                                  |       | 3,674 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                                                               | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Proceeds from exercise of stock options                                                                                                |       | 748                                                    |       | 1,054 |   |
| Proceeds from  issuance of common stock, Senior Secured Note, 2006 Convertible Note and  warrants, net of issuance cost |       | —                                                 |       | 23,820 |   |
| Proceeds from issuance of 2007 Convertible Note                                                                                        |       | 35,000                                                 |       | — |   |
| Payments of Senior Secured Note and 2006 Convertible  Note                                                                             |       | (17,500                                                | )          | — |   |
| Net cash provided by financing activities                                                                                              |       | 18,248                                                 |       | 24,874 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Increase in cash and cash equivalents                                                                                                  |       | 16,718                                                 |       | 24,461 |   |
| Cash and cash equivalents at beginning of period                                                                                       |       | 7,416                                                  |       | 2,548 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Cash and cash equivalents at end of period                                                                                             |       | $                                                      | 24,134     |   | $ | 27,009 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| **Supplemental Disclosure of Cash Flow  Information:**                                                                                 | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Cash paid for taxes                                                                                                                    |       | $                                                      | 8          |   | $ | 2 |   |
|                                                                                                                                   |       |                                                   |       |   |   |
| Cash paid for interest                                                                                                                 |       | $                                                      | 709        |   | $ | — |   |

 

*The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.*

 

 

 

 

5

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**Vyyo Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

**1.****                                     ****General Basis ofPresentation**

 

Theaccompanying unaudited condensed consolidated financial statements of Vyyo Inc.have been prepared in accordance with generally accepted accounting principlesin the United States (“GAAP”) for interim financial information and with theinstructions to the Quarterly Report on Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andnotes required by GAAP for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals,reclassifications and adjustments) considered necessary for a fair presentationhave been included. Operating results for the interim period are notnecessarily indicative of the results that may be expected for the full year.You should read these interim unaudited condensed consolidated financialstatements in conjunction with the audited consolidated financial statements inthe Annual Report on Form 10-K for the year ended December 31, 2006,filed by Vyyo Inc. with the Securities and Exchange Commission (the “SEC”).

 

**Changein Fiscal Year End**

 

Effective December 3,2007, the Company changed its fiscal year end from December 31 to March 31.As a result of this change, the Company’s transition period from January 1,2007 to March 31, 2007 is covered by this Transition Report, which isidentical in all material respects to the Company’s Quarterly Report on Form 10-Qfor the period ended March 31, 2007, filed with the SEC on May 15,2007. The Company’s new fiscal year will commence April 1, 2008 and end onMarch 31, 2009.

 

**Organizationand Principles of Consolidation**

 

Theunaudited condensed consolidated financial statements include the accounts ofVyyo Inc. and its wholly-owned subsidiaries (collectively, “Vyyo” or the “Company”).All material inter-company balances and transactions have been eliminated inconsolidation.

 

TheCompany provides cable and wireless broadband access solutions through twobusiness segments: the “Cable Solutions” segment and the “Wireless Solutions”segment. The Company’s primary focus is now on its Cable Solutions segment, andsignificantly all of its internal resources are focused on enhancing itsvisibility in and penetration of the cable market.

 

TheCompany’s products are designed to address four markets: Cable,Telecommunication, Utility and Wireless Internet Service Providers (“WISP”).Although the Company is engaged to various degrees in these distinct markets,some of the Company’s core technologies overlap with its solutions.

 

TheCompany’s Cable Solutions segment includes products that are used to delivertelephony and data T1/E1 links to enterprise and cellular providers over cable’swireless or hybrid-fiber coax (“HFC”) networks. Additionally, the Company’s “SpectrumOverlay” technology is designed to expand cable operators’ typical HFC networkcapacity in the “last mile” by up to two times in the downstream and up to fourtimes in the upstream. The Cable Solutions segment also includes the results ofoperations of Xtend Networks Ltd., an Israeli privately-held company, andits wholly-owned, United States-based subsidiary, Xtend Networks Inc.(collectively, “Xtend”).

 

TheCompany’s Wireless Solutions segment includes products which enable utilitiesand other network service providers to operate private wireless networks forcommunications, monitoring and Supervisory Control And Data Acquisition oftheir geographically disbursed, remote assets. Additionally, it includes theCompany’s WISP and telecommunications products which address the needs of ruralservice providers to serve customers with wireless high-speed data beyond thereach of traditional terrestrial networks.

 

**Summaryof Significant Accounting Principles**

 

***Financing***

 

On March 28,2007, the Company closed the private placement (the “2007 Financing”) of aconvertible note with 

 

6

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Goldman, Sachs &Co. in exchange for $35,000,000 (the “2007 Convertible Note”), which included$17,500,000 of new funding and $17,500,000 of which the Company used to pay offthe $10,000,000 10% Convertible Note (the “2006 Convertible Note”) and$7,500,000 9.5% Senior Secured Note (the “Senior Secured Note”). The 2007 Financingresulted in estimated net proceeds to the Company of approximately$17,350,000.  See note 7.

 

On March 23,2006, the Company closed the private placement (the “2006 Financing”) of$25,000,000 of common stock, a Convertible Note, a Senior Secured Note andwarrants to purchase common stock to Goldman, Sachs & Co. The 2006Financing  resulted in estimated netproceeds to the Company of approximately $23,400,000. See note 7.

 

***Liquidity and Capital Resources***

 

TheCompany’s consolidated financial statements are presented on a going concernbasis, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company has experienced asignificant loss from operations since its incorporation. For the three monthsended March 31, 2007, the Company incurred a net loss of $11,039,000 andhad an accumulated deficit of $275,615,000. The Company’s ability to continueas a going concern will depend upon its ability to raise additional capital orattain profitable operations. In addition, the Company continues to seek toexpand its revenue base by adding new customers. Failure to secure additionalcapital or to expand its revenue base to achieve profitability, would likelyresult in the Company depleting its available funds and not being able to payits obligations when they become due. The accompanying unaudited interimconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result if the Company isunable to continue as a going concern.

 

***Use of Estimates in the Preparation ofFinancial Statements***

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates, judgments and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period.

 

On anon-going basis, management evaluates its estimates, judgments and assumptions.Management bases its estimates, judgments and assumptions on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from theseestimates, judgments and assumptions.

 

***Foreign Currency Transactions***

 

TheUnited States dollar is the functional currency for the Company and itssubsidiaries and all of its sales are made in United States dollars. Inaddition, a substantial portion of the costs of the Company’s foreignsubsidiaries are incurred in United States dollars. Since the United Statesdollar is the primary currency in the economic environment in which the Companyand its foreign subsidiaries operate, monetary accounts maintained incurrencies other than the United States dollar (principally cash andliabilities) are remeasured into United States dollars using the representativeforeign exchange rate at the balance sheet date. Operational accounts andnonmonetary balance sheet accounts are measured and recorded at the rate ineffect at the date of the transaction. The effects of foreign currencyremeasurement are reported in current operations in the Statements ofOperations as part of “Financing Income” and “Financing Expense.”

 

***Investments in Marketable Securities***

 

TheCompany’s investments in debt securities have been designated asavailable-for-sale. Available-for-sale securities are carried at fair value,which is determined based upon the quoted market prices of the securities, withunrealized gains and losses reported in accumulated other comprehensive income(loss), a component of capital deficiency, until realized. Realized gains andlosses and declines in value judged to be other-than-temporary onavailable-for-sale securities are included in the Statements of Operations aspart of “Financial Income” or “Financial Expenses,” as applicable. The Companyviews its available-for-sale portfolio as available for use in its currentoperations. Accordingly, the Company has classified all investments as short-termin the Statements of Operations under “Short-term investments,” even though thestated maturity date may be one year or more from the current balance sheetdate. Interest, amortization of premiums, accretion of discounts and dividendson securities classified as available-for-sale are also included in theStatements of Operations as part of “Financial Income” or “Financial Expenses,”as applicable.

 

7

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TheCompany recognizes an impairment charge when the decline in the fair values ofthese investments below their cost basis is deemed to be other-than-temporary.The Company considers various factors in determining whether to recognize animpairment charge, including the length of time and the extent to which thefair value has been below the cost basis, the current financial condition ofthe investee and the Company’s intent and ability to hold the investment for aperiod of time sufficient to allow for any anticipated recovery in marketvalue. The Company recognized an other-than-temporary impairment in itsavailable-for-sale securities of $0 and $(42,000) and realized losses of $0 and$31,000 for the three months ended March 31, 2007 and 2006, respectively.

 

***Cash Equivalents***

 

Cashequivalents are short-term, highly-liquid investments and deposits that haveoriginal maturities of three months or less at the time of investment and thatare readily convertible to cash.

 

***Inventory***

 

Inventoryis stated at the lower of cost or market, where cost includes material andlabor. The Company regularly monitors inventory quantities on hand and recordsa provision for excess and obsolete inventory based primarily on the Company’sestimated forecast of future product demand and production requirements.Although the Company makes every effort to ensure the accuracy of its forecastsof future product demand, any significant unanticipated changes in demand ortechnological developments would significantly impact the value of theinventory and the reported operating results. If actual market conditions aredifferent than the Company’s assumptions, additional provisions may berequired. The Company’s estimates of future product demand may prove to beinaccurate, in which case the Company may have understated or overstated theprovision required for excess and obsolete inventory. In the future, if theinventory is determined to be overvalued, the Company would be required torecognize such costs in its cost of sales at the time of such determination. Ifthe Company’s inventory is determined to be undervalued, the Company may haveoverstated its cost of sales in previous periods and would be required torecognize additional operating income only when the undervalued inventory wassold. During the three months ended March 31, 2007 and 2006, the Companydid not write-down any inventory.

 

TheCompany adopted the provisions of the Financial Accounting Standards Board (“FASB”)Statement No. 151, “Inventory Costs” (“FASB 151”), as of January 1,2006, which did not have a material effect on the Company’s financialstatements. FASB 151 requires that abnormal idle facility expenses berecognized as current-period charges, and that allocation of fixed productionoverhead costs to inventory be based on normal capacity of the productionfacility.

 

***Fair Value of Financial Instruments***

 

Thefair value of the financial instruments included in the Company’s workingcapital approximates carrying value. The Syntek Promissory Note, the SeniorSecured Note and the 2006 Convertible Note delivered in the 2006 Financing andthe 2007 Convertible Note delivered in the 2007 Financing are presented in theBalance Sheets as “Long-Term Liabilities,” at approximately their estimatedfair value.

 

***Debt Issuance Costs***

 

 Costsincurred in the issuance of the 2007 Convertible Note in the 2007 Financingincluded cash payments to legal advisors in the three months ended March 31,2007. Costs incurred in the issuance of the 2006 Convertible Note and SeniorSecured Note to the Company’s financial advisor included warrants to purchaseshares of the Company’s common stock and cash payments to legal and financialadvisors in the year ended December 31, 2006. In the year ended December 31,2006, the fair value of the warrants was determined based on the Black-Scholesoption-pricing model. Issuance cost are deferred and amortized as a componentof interest expense over the period from issuance through the first redemptiondate.

 

***Extinguishment of Debt***

 

Asnoted above, in the 2007 Financing, the Company repaid the 2006 Convertible Noteand Senior Secured Note. The Company accounted for this repayment as “extinguishmentof debt” under the Emerging Issues Task Force (“EITF”) 96-19, “Debtor’sAccounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”).The 2007 Convertible Note was initially recorded at fair value, and that amountwas used to determine the debt extinguishment loss of $3,263,000 

 

8

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recognized as a result of$2,231,000 unamortized accretion and $1,032,000 unamortized issuance expensesrelated to the 2006 Convertible Note and Senior Secured Note.

 

***Property and Equipment***

 

Propertyand equipment are stated at cost less accumulated depreciation andamortization. Depreciation and amortization are provided using thestraight-line method over the estimated useful lives of the assets.

 

Leaseholdimprovements are amortized over the shorter of the lease term or the estimateduseful life of the related asset.

 

***Impairment ofLong-Lived Assets***

 

Statementof Financial Accounting Standards (“SFAS”) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), requiresthat long-lived assets, including definite life intangible assets to be heldand used or disposed of by an entity, be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable. Under SFAS No. 144, if the sum of theexpected future cash flows (undiscounted and without interest charges) of thelong-lived assets is less than the carrying amount, the Company would recognizean impairment loss and would write down the assets to their estimated fairvalues.

 

***Revenue Recognition***

 

TheCompany generates revenues from sales of its products. As of March 31,2007, the Company’s revenues from services were not significant. The Company’sproducts are off-the-shelf products, sold “as is,” without further adjustmentor installation. When establishing a relationship with a new customer, theCompany also may sell these products together as a package, in which case theCompany typically ships products at the same time to the customer.

 

 Revenuesfrom the Company’s products are recorded when (a) persuasive evidence ofan arrangement exists; (b) delivery has occurred and customer acceptancerequirements have been met, if any, and the Company has no additionalobligations; (c) the price is fixed or determinable; and (d) collectionof payment is reasonably assured. The Company’s standard sales terms generallydo not include customer acceptance provisions. However, where there is a rightof return, customer acceptance provision or there is uncertainty about customeracceptance, the associated revenue is deferred until the Company has evidenceof customer acceptance.

 

EITF No. 00-21,“Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”),addresses when and how an arrangement involving multiple deliverables should bedivided into separate units of accounting. The Company’s multiple deliverablesarrangements are those arrangements with new customers in which the Companysells its products together as a package. Because the Company delivers theseoff-the-shelf products at the same time and the four revenue recognitioncriteria discussed above are met at that time, the adoption of EITF No. 00-21had no impact on the Company’s financial position and results of operations.

 

TheCompany recognizes revenues related to the exclusivity provisions contained inthe equipment purchase agreement with Arcadian Networks, Inc. on a straightline basis, over the 10-year term of that agreement.

 

***Product Warranty***

 

TheCompany provides for product warranty costs when it recognizes revenue fromsales of its products. The provision is calculated as a percentage of sales,based on historical experience.

 

***Research and Development Costs***

 

Researchand development costs are expensed as incurred and consist primarily ofpersonnel, facilities, equipment and supplies for research and developmentactivities. Grants received from the Office of the Chief Scientist at theMinistry of Industry and Trade in Israel and other research foundations arededucted from research and development expenses as the related costs areincurred or as the related milestone is met.

 

9

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***Loss Per Share of Common Stock***

 

Basic and diluted lossper share are calculated and presented in accordance with SFAS No. 128, “EarningsPer Share” (“SFAS No. 128”), for all periods presented. All outstandingstock options and shares of restricted stock have been excluded from thecalculation of the diluted loss per share because all such securities are notdilutive for the presented periods. For the three months ended March 31,2007, the total number of shares of common stock related to outstanding optionsand the 2007 Convertible Note and warrants issued in connection with the 2006Financing and restricted stock excluded from the calculations of diluted lossper share were 10,118,466. For the three months ended March 31, 2006, thetotal number of shares of common stock related to outstanding options and the2006 Convertible Note, warrants issued in connection with the 2006 Financingand restricted stock excluded from the calculations of diluted loss per sharewere 7,579,390.

 

***Stock-Based Compensation***

 

Priorto January 1, 2006, the Company accounted for employees’ stock-basedcompensation under the intrinsic value model in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”) and related interpretations. In accordance with SFAS No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure”.

 

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-basedPayment” (“SFAS 123(R)”). SFAS 123(R) supersedes APB 25 andrelated interpretations and amends SFAS No. 95, “Statement of Cash Flows.”SFAS 123(R) requires that awards classified as equity awards beaccounted for using the grant-date fair value method. The fair value of stockoptions is determined based on the number of shares granted and the price ofthe Company’s common stock, and determined based on the Black-Scholes, MonteCarlo and the binomial option-pricing models, net of estimated forfeitures. TheCompany estimated forfeitures based on historical experience and anticipatedfuture conditions. The Monte Carlo valuation model is used only for stockoptions granted to executives in 2005 and 2006 if vesting is subject to marketcondition criteria.

 

In March 2005,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 107 (“SAB 107”). SAB 107 provides supplemental implementation guidanceon SFAS 123(R), including guidance on valuation methods, inventorycapitalization of stock-based compensation cost, income statement effects,disclosures and other issues. SAB 107 requires stock-based compensation to beclassified in the same expense line items as cash compensation. The Company hasapplied the provisions of SAB 107 in its adoption of SFAS 123(R). Inaddition, the Company has reclassified stock-based compensation from priorperiods to correspond to current period presentation within the same operatingexpense line items as cash compensation paid to employees.

 

TheCompany elected to recognize compensation cost for options granted with serviceconditions that have graded vesting schedules using the graded vestingattribution method.

 

TheCompany elected to adopt the modified prospective transition method permittedby SFAS 123(R). Under this transition method, the Company implementedSFAS 123(R) as of the first quarter of 2006 with no restatement ofprior periods. The valuation provisions of SFAS 123(R) apply to newawards and to awards modified, repurchased or cancelled after January 1,2006. Additionally, compensation cost for the portion of awards for which therequisite service has not been rendered that are outstanding as of January 1,2006 are recognized over the remaining service period using the grant-date fairvalue of those awards as calculated for pro forma disclosure purposes underSFAS 123.

 

In November 2005,FASB issued Staff Position No. SFAS 123(R)-3 “Transition ElectionRelated to Accounting for Tax Effects of Share-Based Payment Awards.” TheCompany has elected to adopt the alternative transition method provided in thisFASB Staff Position for calculating the tax effects of stock-based compensationpursuant to SFAS 123(R). The alternative transition method includessimplified methods to establish the beginning balance of the additional paid-incapital pool related to the tax effects of employee stock-based compensation,which is available to absorb tax deficiencies recognized after adoption ofSFAS 123(R).  As of January 1,2006, the cumulative effect of the Company’s adoption of SFAS 123(R) wasnot material.

 

TheCompany accounts  for equity instruments issued tothird party service providers (non-employees)  inaccordance with the fair value of the instruments based on an option-pricingmodel, pursuant  to the guidance in EITF 96-18 “Accountingfor Equity Instruments That  Are Issued to OtherThan Employees for Acquiring, or in Conjunction with  SellingGoods or 

 

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Services.” The Companyrevaluates the fair value of the options granted over the related serviceperiods and recognizes the value over the vesting period using theBlack-Scholes model.

 

Thefair value of each stock option granted during the three months ended March 31,2007 and 2006 was estimated at the date of grant using the Black-Scholes andthe binomial valuation models, using the following assumptions:

 
| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Black-Scholes model assumptions:                |       |                                             |       |   |   |
| Risk-free  interest rates ranges                |       | 4.68                                             | %          | 4.66%-4.74 | % |
| Weighted-average  expected life range           |       | 10                                               |       | 2.5-5.0 |   |
| Volatility  ranges                              |       | 0.61                                             |       | 0.62-0.76 |   |
| Dividend yields                                 |       | —                                           |       | — |   |
|                                            |       |                                             |       |   |   |
|  Monte Carlo  valuation model assumptions: |       |                                             |       |   |   |
| Risk-free  interest rate                        |       | —                                           |       | 4.60 | % |
| Weighted-average  expected life                 |       | —                                           |       | 5.22 |   |
| Volatility                                      |       | —                                           |       | 0.61 |   |
| Dividend yields                                 |       | —                                           |       | — |   |
|                                            |       |                                             |       |   |   |
| Binomial valuation model assumptions:           |       |                                             |       |   |   |
| Risk-free  interest rates ranges                |       | 4.46%-5.16                                       | %          | 4.20%-4.60 | % |
| Weighted-average  expected life range           |       | 2.79-6.54                                        |       | 0.08-8.42 |   |
| Volatility  ranges                              |       | 0.33-0.85                                        |       | 0.61-0.63 |   |
| Dividend yields                                 |       | —                                           |       | — |   |

 

***Recent Accounting Pronouncements***

 

In December 2006,FASB issued Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements”**(“EITF 00-19-2”). EITF 00-19-2specifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement should beseparately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” EITF00-19-2 is effective immediately for registration payment arrangements and thefinancial instruments subject to those arrangements that are entered into ormodified after December 21, 2006. For registration payment arrangementsand financial instruments subject to those arrangements that were entered intoprior to December 21, 2006, the guidance in the EITF 00-19-2 is effectivefor fiscal years beginning after December 15, 2006. The Company does notexpect FSP EITF 00-19-2 to have a material impact on the Company’sconsolidated financial statements.

 

In February 2007,FASB issued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”). This standard permits companies to choose to measuremany financial assets and financial liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. This statement will be effective for the Company asapplicable beginning January 1, 2008. The Company is currently evaluatingthe impact that the adoption of SFAS 159 would have on its consolidatedfinancial statements.

 

In July 2006, FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax positiontaken, or expected to be taken, in a tax return. FIN 48 requires theaffirmative evaluation that is more-likely-than-not, based on the technicalmerits of a tax position, that an enterprise is entitled to economic benefitsresulting from positions taken in income tax returns. If a tax position doesnot meet the more-likely-than-not recognition threshold, the benefit of thatposition is not recognized in the financial statements. FIN 48 also requirescompanies to disclose additional quantitative and qualitative information intheir financial statements about uncertain tax positions. The Company adoptedFIN 48 on January 1, 2007, which did not have a material impact on itsconsolidated financial statements.

 

***Reclassifications***

 

Certainamounts in the 2006 financial statements have been reclassified to conform tothe 2007 presentation.

 

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**2.****            ****Inventory, net**

 

Inventory is comprised of the following:

 

| ** **      | ** ** | **March 31,**                                     | ** **   | **December 31,** | ** ** |
|-----------------|------------|--------------------------------------------------------|--------------|-----------------------|------------|
| ** **      | ** ** | **2007**                                               | ** **   | **2006**              | ** ** |
| ** **      | ** ** | **(In thousands of U. S. $)** | *** *** |
| Raw materials   |       | $                                                      | 421          |                  | $          | 395 |   |
| Work in process |       | 455                                                    |         | 445                   |       |
| Finished goods  |       | 1,444                                                  |         | 1,522                 |       |
|            |       |                                                   |         |                  |       |
|            |       | $                                                      | 2,320        |                  | $          | 2,362 |   |

 

**3.****            ****Agreement with Arcadian Networks, Inc.**

 

On March 31, 2006, the Company entered into anEquipment Purchase Agreement (the “ANI Agreement”) with Arcadian Networks, Inc.(“ANI”). Davidi Gilo, the Company’s Chairman of the board of directors andformer Chief Executive Officer, is also the Chairman of the board of directorsof ANI and the sole member of the limited liability company that is the generalpartner of a major stockholder of ANI. Avraham Fischer, a director of theCompany, is co-chief executive officer and a director of Clal Industries andInvestments, Ltd. (“Clal”), which invested $20,000,000 in ANI in August 2006.  Goldman, Sachs & Co., a majorstockholder in the Company and holder of the 2007 Convertible Note is astockholder of ANI.

 

Pursuantto the ANI Agreement, the Company sells certain of its products and services toANI over a 10-year term. The Company distributes these products to ANI on anexclusive basis in the United States, Canada and the Gulf of Mexico (the “RelevantTerritory”) to identified markets if: (a) ANI makes two payments of$4,000,000 during each of the first two years of the ANI Agreement; (b) ANImeets specified annual minimum product purchase amounts; and (c) ANI’soutstanding balances are below specified amounts. The exclusivity payments arenot refundable under any circumstances.

 

Exclusivityafter the second year will depend on ANI’s meeting the minimum purchaseamounts. In addition, to maintain its exclusivity rights in the ANI Agreement,ANI must purchase at least 25% of its minimum product purchase amounts withinthe first six months of any given year, and at least 32% within the first sixmonths of any given year if ANI purchases from third parties more than 15% ofproducts with similar functionality to the products covered by the ANIAgreement.

 

TheANI Agreement fixes the product prices for the first two years, after whichtime prices are subject to adjustment according to the amount of productpurchased by ANI compared to specified forecasted purchase amounts.

 

TheANI Agreement does not prohibit the Company from selling any of its products orservices to areas outside of the Relevant Territory. In addition, the Companymay sell its products within the Relevant Territory to end users or resellersother than those engaged in the following markets: (a) electricitygeneration, transmission or distribution (both downstream and upstream); (b) oilor gas exploration, manufacture, transportation or distribution; (c) waterutility; (d) chemical manufacture; (e) mining; (f) environmentalmonitoring or protection; (g) transportation facilities (includingrailroads); (h) border control; and (i) public safety. Specifically,the Company may sell its products in the Relevant Territory to cable televisioncustomers.

 

TheCompany received an initial purchase order for $10,000,000 on March 31,2006 (related to products to be purchased in the first year of the ANIAgreement) and the first exclusivity payment of $4,000,000 on April 3,2006 which satisfied ANI’s requirements for exclusivity in the first year ofthe ANI Agreement. As of March 31, 2007, the Company had not received thesecond $4,000,000 exclusivity payment.

 

Forthe three months ended March 31, 2007, the Company recognized revenue of$161,000 under the ANI Agreement, which included income related to theexclusivity payment of $100,000 and product maintenance of $61,000. The Companywill recognize the exclusivity payments from ANI over the 10-year term of theANI Agreement. As of the date of this report, ANI did not have an outstandingaccounts receivable balance and the Company had deferred revenues from ANI salesof $3,679,000.

 

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**4.****                                     ****Promissory Note**

 

On June 30,2004, the Company acquired all of the outstanding shares of Xtend, an Israeliprivately-held company that was a development stage company at the time. Aspart of the purchase, the Company delivered a Promissory Note in the principalamount of $6,500,000 originally payable on March 31, 2007 (the “SyntekPromissory Note”). The Company accounted for the Syntek Promissory Note ascontingent consideration since it was payable only if the Company was unable tomeet certain key provisions, as described in the Syntek Promissory Note. Thesekey provisions were amended on December 16, 2005 as follows:

 

·                                           the maturitydate was extended by one year from March 31, 2007 to March 31, 2008;

 

·                                          the provisionthat would have allowed acceleration of the Syntek Promissory Note if the sumof the Company’s cash, cash equivalents, short-term investments and accountsreceivables, net of short- and long-term debt, was less than $20,000,000 on December 31,2005 or June 30, 2006 was waived;

 

·                                           The SyntekPromissory Note provides for cancellation in the event that:

 

(a)                                 the Company’srevenue (including that of all subsidiaries, except for newly acquiredbusinesses) equals or exceeds $60,000,000 million and gross margin equalor exceeds 35%, for the year ended December 31, 2007; or

 

(b)                                beginning on thefirst day that the Company’s common stock closes at or above $18.00 per shareand at any time thereafter, a sale by the holder of all of its Remaining Sharesat an average sales price at or above $18.00 per share. “Remaining Shares”means those shares of the Company’s common stock received by the holder inconnection with the Xtend acquisition; or

 

(c)                                 all of the RemainingShares are included in a successfully concluded secondary offering (on Form S-3or otherwise) at an offering price at or above $18.00 per share in which theholder either (i) sells all of the Remaining Shares or (ii) isprovided an opportunity to sell all of such shares into such secondary offeringand elects not to sell, provided that the successfully concluded offeringincluded no fewer than the number of Remaining Shares; or

 

(d)                                the receipt by theholder of a bona fide offer for the purchase of all of the Remaining Shares atan average sales price at or above $18.00 per share. A “bona fide” offer meansa fully funded and unconditional offer for purchase by a buyer who has provableand sufficient financial resources to purchase all of the Remaining Shares forcash within a commercially reasonable period of time from the date of offer,not to exceed 30 days.

 

As security for the amended Syntek Promissory Note, the Companydelivered a $5,000,000 irrevocable letter of credit, and deposited $5,000,000with an Israeli bank and agreed to restrictions on withdrawal of this amountuntil the letter of credit is cancelled. The letter of credit will be cancelled if, for 45 consecutive tradingdays, all of the following conditions exist: (a) the weighted averagetrading price of the Company’s common stock is equal to or higher than $18.00per share; (b) the average daily trading volume of the Company’s commonstock is higher than 150,000 shares per day; and (c) the holder islawfully able to sell publicly in one transaction or in a series oftransactions, during such 45 consecutive trading days, all of its shares of theCompany’s common stock without registration under the Securities Act of 1933,as amended.

 

The Company determined that, as of the time of the amendment of theSyntek  Promissory Note in December 2005and immediately prior to its amendment, the contingency had been resolved andtherefore the Company recorded $6,500,000 as additional consideration paid inthe Xtend acquisition. This resulted in an increase to the intangible assetsacquired. Following an impairment test performed on the intangible assets, theassets were immediately impaired. In addition, the Company estimated the fairvalue of the amended Syntek Promissory Note at $3,967,000 and recorded thisamount in the Balance Sheets as a long-term liability under “Promissory note.”The Company recorded $2,533,000, the difference between the value of theamended Syntek Promissory Note and the original Syntek Promissory Note, as “GainResulting from Amendment to Promissory Note” in the Consolidated Statements ofOperations for the year ended December 31, 2005. In future periods theCompany will record an accretion to the value of the amended Syntek PromissoryNote up to $6,500,000. The Company will record the accretion of $2,533,000 asfinance expenses during the remaining term of the amended Syntek PromissoryNote, unless it is cancelled as 

 

 

 

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providedabove. For the three months ended March 31, 2007, the Company recorded$323,000 in financial expenses related to the accretion of the amended SyntekPromissory Note.

 

**5.****                                     ****Accrued Liabilities**

 

Accruedliabilities consist of the following:

 

| ** **                                        | ** ** | **March 31,**                               | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                                        | ** ** | **(In thousands of U.S. $)** | ** ** |
| Withholding tax                                   |       | $                                                | 3,577      |                  | $          | 3,321 |   |
| Compensation and benefits                         |       | 2,185                                            |       | 1,995                 |       |
| Royalties                                         |       | 950                                              |       | 940                   |       |
| Professional fees                                 |       | 322                                              |       | 361                   |       |
| Deferred rent                                     |       | 361                                              |       | 354                   |       |
| Interest payable to Goldman, Sachs & Co. |       | 14                                               |       | 285                   |       |
| Warranty*                                         |       | 57                                               |       | 66                    |       |
| Deferred revenues                                 |       | 70                                               |       | 66                    |       |
| Other                                             |       | 604                                              |       | 489                   |       |
|                                              |       | $                                                | 8,140      |                  | $          | 7,877 |   |

 

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*                    Thechanges in the warranty balances consist of the following:

 

| ** **                                    | ** ** | **Three Months  Ended  March 31,**     | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006**                               | ** ** |
| ** **                                    | ** ** | **(In thousands of U.S. $)** | ** ** |
| Balance at beginning of period                |       | $                                                | 66         |                                   | $          | 104 |   |
| Usage of warranty                             |       | —                                           |       | (59                                    | )          |
| Product warranty issued for new sales         |       | 23                                               |       | 177                                    |       |
| Changes in accrual of warranty periods ending |       | (32                                              | )          | (156                                   | )          |
| Balance at end of period                      |       | $                                                | 57         |                                   | $          | 66 |   |

 

**6.****                                     ****Severance Liabilities**

 

Theamounts paid related to severance and severance expenses were:

 

| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands of U.S. $)** | ** ** |
| Amounts paid related to severance |       | $                                                | 129        |   | $ | 174 |   |
|                              |       |                                             |       |   |   |
| Severance expenses*               |       | $                                                | 310        |   | $ | 397 |   |

 

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*                    Withrespect to the Company’s Israeli employees, the Company expects to contribute$366,000 to a defined contribution plan and $159,000 to insurance and pensionplans for the year ended December 31, 2007(includes amounts contributed in the three months ended March 31, 2007).

 

**7.****                                     ****Financing**

 

**2007Financing**

 

 OnMarch 28, 2007, the Company issued the 2007 Convertible Note ($35,000,000principal; 5% annual interest), initially convertible into 3,500,000 shares ofthe Company’s common stock to Goldman, Sachs & Co., of which$17,500,000 was used to pay off in full the Company’s outstanding 2006Convertible Note and Senior Secured Note delivered in the 2006 Financingdescribed below.

 

 

 

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The2007 Convertible Note is convertible at the holder’s option into shares of theCompany’s common stock at a conversion price of $10.00 per share, provided,that in no event may the holder own of record more than 14.8% of theoutstanding shares of the Company’s common stock. In the event of a FundamentalTransaction (as defined in the 2007 Convertible Note to include sales of theCompany’s assets and certain business combination transactions), the holdermay, at its option, require the Company to redeem all or any portion of the2007 Convertible Note at a price equal to 101% of the principal amount, plusall accrued and unpaid interest, if any, and, subject to specified conditions,may be entitled to a cash “make-whole” premium, calculated in accordance withthe terms of the 2007 Convertible Note.

 

Underthe Amended and Restated Registration Rights Agreement executed in connectionwith the 2007 Convertible Note, the Company is required to file aregistration statement on Form S-3 registering the resale of the sharesissuable upon conversion of the 2007 Convertible Note for an initial two-yearperiod, subject to extension under specified circumstances.

 

TheCompany accounted for the issuance of the 2007 Convertible Note (and theresulting repayment of the 2006 Convertible Note and Senior Secured Note) asextinguishment of debt under EITF 96-19. As a result of the extinguishment ofthe 2006 Convertible Note and Senior Secured Note, the Company recorded$3,263,000 in the three months ended March 31, 2007 as financial expensesconsisting of $2,231,000 of unamortized accretion and $1,032,000 of unamortizedissuance expenses.

 

Inaccordance with the provisions of EITF 96-19, the Company recorded the 2007Convertible Note at its fair value, which is estimated at $35,000,000. The 2007Financing resulted in estimated net proceeds to the Company of approximately$17,350,000, following pay off of the 2006 Convertible Note and Senior SecuredNote and payment of issuance expenses of approximately $150,000.

 

**2006 Financing**

 

On March 23,2006, the Company closed the private placement of $25,000,000 of common stock,a Convertible Note, a Senior Secured Note and warrants to purchase common stockto Goldman, Sachs & Co. In the 2006 Financing, the Company issued (a) 1,353,365shares of common stock, (b) the 2006 Convertible Note ($10,000,000; 10%annual interest), (c) the Senior Secured Note ($7,500,000 principal; 9.5%annual interest), and (d) warrants to purchase 298,617 shares of commonstock. The transaction resulted in estimated net proceeds to the Company ofapproximately $23,400,000.

 

TheCompany allocated the proceeds received in the 2006 Financing to the differentinstruments based on the relative fair value of each instrument as follows:

 

| ** **                                                               | ** ** | ** **          | ** ** | **Relative fair** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **Face value** | ** ** | **value**              | ** ** |
| 1,353,365 shares of common stock                                         |       | $                   | 7,500,000  |                   | $          | 8,260,000 |   |
| 10% Convertible Note                                                     |       | 10,000,000          |       | 10,111,000             |       |
| 9.5% Senior Secured Note                                                 |       | 7,500,000           |       | 4,830,000              |       |
| Warrants to  purchase 298,617 shares of common stock for $0.10 per share |       | —              |       | 1,799,000              |       |
| Total gross proceeds received in 2006 Financing                          |       | $                   | 25,000,000 |                   | $          | 25,000,000 |   |

 

Theestimated issuance costs of the 2006 Financing were approximately $1,993,000including (a) a $1,210,000 payment and issuance of warrants to purchase79,559 shares of the Company’s common stock, at exercise prices ranging from$0.10 to $10.00 (at an estimated fair value of $366,000), to the Company’sfinancial advisor and (b) approximately $417,000 for legal and otherprofessional fees and costs. Of these estimated issuance costs, $806,000 and$385,000 were allocated to the 2006 Convertible Note and the Senior SecuredNote, respectively. These costs were amortized based on the effective interestamortization method through the five-year term until maturity of the notes andrecorded as interest expense, based on the effective interest method ofamortization.  The issuance costsdescribed above were allocated to the different instruments based on theirrelative fair values.

 

Asnoted above, the Company repaid in full the 2006 Convertible Note and SeniorSecured Note with proceeds from the 2007 Financing, and the unamortizedaccretion and unamortized issuance expenses were extinguished at that time.

 

 

 

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**8.****                                     ****Stock-Based Compensation**

 

**CommonStock Reserved for Issuance**

 

As of March 31,2007, the Company reserved approximately727,709 shares of common stock for issuance, upon exercise of stock options andissuance of shares of restricted stock reserved under its stock-basedcompensation plans.  These shares areavailable for issuance under the plans described below.

 

**Stock Option Plans**

 

TheCompany has the following stock option plans: the 1999 Employee and ConsultantEquity Incentive Plan and the Third Amended and Restated 2000 Employee andConsultant Equity Incentive Plan (the “2000 Plan”). The Company’s 1996 EquityIncentive Plan expired by its terms as of February 3, 2006. The Companycurrently makes grants only from the 2000 Plan, which permits the grant ofincentive stock options (“ISOs”) to employees, nonstatutory stock options toemployees, directors and consultants and stock options which comply withIsraeli law if granted to persons who are subject to Israel income tax. The2000 Plan also provides for the awards of restricted stock and stock bonuses.

 

ISOsmust have an exercise price equal to the fair value of the common stock on thegrant date as determined by the Company’s board of directors. The period withinwhich the option may be exercised is determined at the time of grant, but maynot be longer than 10 years. The number of shares reserved under the 2000 Planis subject to automatic annual increases on the first day of each fiscal year,equal to the lesser of 1,000,000 shares or 10% of the number of outstandingshares on the last day of the immediately preceding year. On May 10, 2007,the Company’s stockholders increased the 1,000,000 shares added annually to the2000 Plan to 1,500,000 shares effective as of January 1, 2008 and,effective immediately, added an additional 1,000,000 shares to the total numberavailable for issuance under the 2000 Plan.

 

In August 2005,the Company granted certain employees options to purchase 145,000 shares of theCompany’s common stock at an exercise price of $0.10 per share. The marketprice on the date of grant was $6.75, which resulted in deferred stockcompensation of $964,000, of which $222,000 was amortized during the year endedDecember 31, 2005 under APB No. 25.

 

In March 2005,the Company granted certain executives 630,000 options to purchase shares ofcommon stock for $7.50 to $10.50 per share. The options vest and becomeexercisable if the closing price of the Company’s common stock is at or abovespecified prices for 10 trading days out of any 30 consecutive trading days, solong as the optionee remains an employee of or consultant to the Company on the10th day of the period. The options expire five years after the grant date, or,if earlier, 90 days after the optionee is no longer an employee of orconsultant to the Company. As of March 31, 2007, 135,000 of these stockoptions were forfeited. In the three months ended March 31, 2007 and 2006,the Company recorded expenses of $117,000 and $117,000, respectively, relatedto these stock options.

 

In March 2007,the Company granted its Vice Chairman of the board of directors 250,000 optionsto purchase shares of common stock for $6.31 per share. This grant was made tothe Vice Chairman in his individual capacity as a consultant to the Company.The options vest and become exercisable in equal monthly installments over48 months. These stock options may be accelerated upon the occurrence ofspecified events, including certain financing events, approval of the Company’sproducts in identified cable companies or upon a “Change of Control” (asdefined in the Consulting Agreement). In the three months ended March 31,2007, the Company recorded expenses of $36,000 related to these stock options.

 

**Grantof Stock Options to Davidi Gilo**

 

On February 10,2006, the Company’s Compensation Committee approved the grant of stock optionsto Mr. Gilo, Chairman of the board of directors, to purchase 900,000shares of the Company’s common stock. At the time, Mr. Gilo also was ChiefExecutive Officer of the Company. These options vest as follows:

 

(a)                 300,000 shares vested upon the closing ofthe Financing.

 

(b)                300,000 shares vest at such time as theper share price of the Company’s common stock closes at or above $10.44 for aperiod of any 22 (consecutive or non-consecutive) trading days, so long as Mr. Giloremains an employee of or consultant to the Company on the 22nd day of suchperiod.

 

 

 

16

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(c)                 300,000 shares vest at such time as theper share price of the Company’s common stock closes at or above $15.66 for aperiod of any 22 (consecutive or non-consecutive) trading days, so long as Mr. Giloremains an employee of or consultant to the Company on the 22nd day of suchperiod.

 

The Companyrecorded stock-based compensation expenses of $750,000 for the three monthsended March 31, 2006 related to the 300,000 options granted to Mr. Gilothat vested upon the closing of the 2006 Financing. In connection with the600,000 stock options granted to Mr. Gilo which vest based on the closingprice of the Company’s common stock, the Company recorded $79,000 and $30,000in the three months ended March 31, 2007 and 2006, respectively. Thesestock-based compensation expenses were determined based on the Monte Carlovaluation method.

 

**RestrictedStock**

 

Recipientsof shares of restricted stock are entitled to cash dividends, to the extentpaid, and to vote their shares throughout the restricted period. The shares arevalued at the market price on the grant date, and compensation is amortizedratably over the vesting period. The Company must recognize compensationexpenses for shares of restricted stock subject to designated performancecriteria if the performance criteria are being attained or it is probable thatthey will be attained.

 

In July 2004, theCompany granted a former Xtend employee 146,000 shares of restricted stock, ofwhich 71,000 shares have vested and 75,000 shares were to vest subject todesignated performance criteria. In the three months ended March 31, 2007,the Company did not record compensation expenses since it did not achieve theperformance conditions related to the remaining restricted stock.

 

Asummary of stock option plans, shares of restricted stock and relatedinformation, under all of the Company’s equity incentive plans as of March 31,2007 is as follows (in thousands, except per share data):

 
| ** **                      | ** ** | ** **          | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** **          | ** ** |
|---------------------------------|------------|---------------------|------------|-----------------|------------|--------------|------------|---------------------|------------|
| ** **                      | ** ** | **Options/Shares**  | ** ** | ** **      | ** ** | **average**  | ** ** | **Weighted**        | ** ** |
| ** **                      | ** ** | **available**       | ** ** | **Number**      | ** ** | **exercise** | ** ** | **average**         | ** ** |
| ** **                      | ** ** | **for grants** | ** ** | **outstanding** | ** ** | **price**    | ** ** | **fair value** | ** ** |
| Balance at January 1, 2007 |       | 559                 |       | 6,063           |       | $            | 5.41       |                | —     |   |
| Authorized                      |       | 1,000               |       | —          |       | —       |       | —              |       |
| Granted*                        |       | (1,130              | )          | 1,130           |       | $            | 5.86       |                | $          | 2.65 |   |
| Exercised                       |       | —              |       | (278            | )          | $            | 4.82       |                | —     |   |
| Cancelled                       |       | 299                 |       | (299            | )          | $            | 6.53       |                | —     |   |
| Balance at March 31, 2007  |       | 728                 |       | 6,616           |       | $            | 5.46       |                | —     |   |
|                                 |            |                     |            |                 |            |              |            |                     |            |  |  |

 

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*                    Includes51,250 options granted to non-employee directors in the three months ended March 31,2007 and additional 250,000 options granted to the Vice Chairman who alsoserves as a consultant.

 

Thefollowing table summarizes information concerning outstanding and exercisableoptions under stock option plans as of March 31, 2007:

 
| ** **                      | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **average**                  | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **remaining**                | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| **Range of exercise** | ** ** | **Number**                   | ** ** | **contractual**              | ** ** | **price per** | ** ** | **Number** | ** ** | **price per** | ** ** |
| **Prices**                      | ** ** | **outstanding**              | ** ** | **life**                     | ** ** | **Share** | ** ** | **exercisable** | ** ** | **share** | ** ** |
| ** **                      | ** ** | **(In thousands)**      | ** ** | **(In years)**          | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Plans:                          |       |                         |       |                         |       |   |   |   |   |   |   |
| 0.10                            |       | 126                          |       | 3.52                         |       | $ | 0.10 |   | 44 |   | $ | 0.10 |   |
| 0.99                            |       | 3                            |       | 0.86                         |       | 0.99 |   | 3 |   | 0.99 |   |
| 2.27-3.40                       |       | 637                          |       | 3.71                         |       | 3.24 |   | 470 |   | 3.20 |   |
| 3.57-5.22                       |       | 2,725                        |       | 4.89                         |       | 4.64 |   | 1,405 |   | 4.43 |   |
| 5.60-8.39                       |       | 2,999                        |       | 4.41                         |       | 6.73 |   | 1,048 |   | 6.76 |   |
| 8.43-10.50                      |       | 126                          |       | 2.70                         |       | 9.44 |   | 35 |   | 9.05 |   |
|                            |       | 6,616                        |       | 4.49                         |       | $ | 5.46 |   | 3,005 |   | $ | 5.04 |   |

 

 

 

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**9.****                                     ****Comprehensive Loss**

 

Thecomponents of comprehensive loss are as follows:

 

| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(In thousands of U.S. $)** | ** ** |
| Loss                                             |       | $                                                | (11,039    | ) | $ | (7,980 | ) |
| Unrealized loss on available-for-sale securities |       | (1                                               | )          | — |   |
| Comprehensive loss                               |       | $                                                | (11,040    | ) | $ | (7,980 | ) |

 

**10.****                              ****Segment Reporting**

 

TheCompany’s business is divided into two segments: “Cable Solutions” and “WirelessSolutions.”

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Consolidated revenues from:        |       |                                             |       |   |   |
| Cable Solutions                    |       | $                                                | 462        |   | $ | 463 |   |
| Wireless  Solutions:               |       |                                             |       |   |   |
| Related party                      |       | 161                                              |       | 1,800 |   |
| Other                              |       | —                                           |       | 106 |   |
|                               |       | 161                                              |       | 1,906 |   |
| Consolidated  revenues             |       | $                                                | 623        |   | $ | 2,369 |   |
|                               |       |                                             |       |   |   |
| Operating loss:                    |       |                                             |       |   |   |
| Cable Solutions                    |       | $                                                | (5,605     | ) | $ | (2,690 | ) |
| Wireless  Solutions                |       | (1,266                                           | )          | (4,864 | ) |
|                               |       |                                             |       |   |   |
| Total  consolidated operating loss |       | (6,871                                           | )          | (7,554 | ) |
| Financial income                   |       | 244                                              |       | 155 |   |
| Financial  expenses                |       | (4,162                                           | )          | (424 | ) |
| Income taxes                       |       | (250                                             | )          | (157 | ) |
| Loss for the  period               |       | $                                                | (11,039    | ) | $ | (7,980 | ) |

 

 

 

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Thefollowing provides information on the Company’s assets:

 

| ** **                                        | ** ** | **March 31,**                               | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                                        | ** ** | **(In thousands of U.S. $)** | ** ** |
|                                              |       |                                             |       |                  |       |
| Cash, cash equivalents and short-term investments |       | $                                                | 31,154     |                  | $          | 18,688 |   |
| Restricted cash                                   |       | 5,000                                            |       | 5,000                 |       |
| Debt issuance costs, net                          |       | 150                                              |       | 1,074                 |       |
| Cable Solutions                                   |       | 3,370                                            |       | 3,139                 |       |
| Wireless Solutions                                |       | 3,224                                            |       | 4,248                 |       |
|                                              |       | $                                                | 42,898     |                  | $          | 32,149 |   |

 

| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands of U.S. $)** | ** ** |
| Expenditures for long-lived assets:     |       |                                             |       |   |   |
| Cable Solutions                         |       | $                                                | 148        |   | $ | 17 |   |
| Wireless  Solutions                     |       | 58                                               |       | 17 |   |
|                                    |       | $                                                | 206        |   | $ | 34 |   |
|                                    |       |                                             |       |   |   |
| Depreciation and amortization expenses: |       |                                             |       |   |   |
| Cable Solutions                         |       | $                                                | 158        |   | $ | 115 |   |
| Wireless  Solutions                     |       | 60                                               |       | 114 |   |
|                                    |       | $                                                | 218        |   | $ | 229 |   |

 

Thefollowing is a summary of operations within geographic areas based on thelocation of the customers:

 

| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **(In thousands of U.S. $)** | ** ** |
| Revenues from sales to affiliated and unaffiliated  customers in the: |       |                                             |       |   |   |
| Cable Solutions segment:                                              |       |                                             |       |   |   |
| North America                                                         |       | $                                                | 462        |   | $ | 463 |   |
| Wireless Solutions segment:                                           |       |                                             |       |   |   |
| North America,  related party                                         |       | 161                                              |       | 1,800 |   |
| North America                                                         |       | —                                           |       | 95 |   |
| Rest of the  world                                                    |       | —                                           |       | 11 |   |
|                                                                  |       | $                                                | 161        |   | $ | 1,906 |   |
|                                                                  |       |                                             |       |   |   |
|                                                                  |       | $                                                | 623        |   | $ | 2,369 |   |

 

| ** **                  | ** ** | **March 31,**                               | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2007**                                         | ** ** | **2006**              | ** ** |
| ** **                  | ** ** | **(In thousands of U.S. $)** | ** ** |
| Property and equipment, net |       |                                             |       |                  |       |
| Israel                      |       | $                                                | 1,020      |                  | $          | 1,008 |   |
| United States               |       | 642                                              |       | 668                   |       |
|                        |       | $                                                | 1,662      |                  | $          | 1,676 |   |

 

Salesto major customers out of total revenues are as follows:

 

| ** **                 | ** ** | **Three Months Ended  March 31,** |       |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Customer A                 |       | 72                                               | %          | 18 | % |
| Customer B (related party) |       | 26                                               | %          | 76 | % |

 

 

 

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**11.          Subsequent Events**

 

**Employmentof Davidi Gilo, the Company’s Chairman of the Board of Directors**

 

On April 5,2007, the Company entered into an amended and restated employment agreementwith Davidi Gilo (the “2007 Gilo Agreement”), which replaces and supersedes hisemployment agreement executed in 2006.

 

Underthe 2007 Gilo Agreement, Mr. Gilo will continue to serve as the Company’sChairman of the board of directors (subject to approval of the Company’sstockholders and until his successor is duly appointed and elected). Theamendment has the same three-year term as his 2006 employment agreement(beginning February 2006), with automatic renewals thereafter for terms ofone year each, subject to termination upon prior notice by either party. Inexchange for 20 hours of services per week, Mr. Gilo will receive anannual base salary of $200,000, which will be reviewed on or before December 31,2007 and thereafter based on Mr. Gilo’s services and the Company’sfinancial results. Mr. Gilo is eligible to receive employee benefitsavailable to all employees, is eligible to participate in bonus plans that maybe adopted by the Company’s board of directors and will be entitled to anadditional annual bonus based on his and the Company’s performance each year asdetermined by the Company’s board of directors or Compensation Committee. In addition, Mr. Gilo is eligible for stock options that the Company mayaward, and he accrues 30 days of paid vacation for each 12 months ofemployment, up to a maximum of 60 days.

 

If theCompany terminates his employment without “Cause” (as defined in the 2007 GiloAgreement), all of Mr. Gilo’s unvested options vest immediately and Mr. Gilowill receive a severance payment equal to the greater of (a) the fullamount of compensation that Mr. Gilo could have expected under the 2007Gilo Agreement (based on his total compensation (salary and bonus) earned in2007) through the end of the term; or (b) the full amount of compensationthat Mr. Gilo could have expected under the 2007 Gilo Agreement for 18months (based on his total compensation (salary and bonus) earned in 2007).

 

If theCompany terminates his employment without Cause after the initial three-yearterm, all of Mr. Gilo’s unvested options shall immediately and Mr. Gilowill receive a severance payment equal to the full amount of the compensationthat Mr. Gilo could have expected under the 2007 Gilo Agreement for 18months (based on his total compensation (salary and bonus) earned in 2007).

 

If the Company terminateshis employment  for Cause, Mr. Gilowill receive a severance payment equal to full amount of the compensation that Mr. Gilocould have expected under the 2007 Gilo Agreement for three months (based onhis total compensation (salary and bonus) earned in 2007).

 

If Mr. Gilovoluntarily terminates his employment, Mr. Gilo shall receive a severancepayment equal to the full amount of the compensation that Mr. Gilo couldhave expected under the 2007 Gilo Agreement for nine months (based on his totalcompensation (salary and bonus) earned in 2007).

 

**CostReduction Program**

 

On July 23,2007, the Company’s management implemented a cost reduction program. Inconnection with this program, the Company reduced its workforce byapproximately 16% in the third quarter of 2007 (when compared to the workforcelevels as of June 2007). The Company recorded approximately $400,000 in aone-time cash severance payment and related expenses. This cost reduction didnot require the termination of any contractual obligations or require theCompany to incur other material associated costs.

 

 

 

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**Item 2.****                                  ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

Youshould read this Management’s Discussion and Analysis of Financial Conditionand Results of Operations in conjunction with our condensed consolidatedfinancial statements and accompanying notes appearing elsewhere in thisTransition Report on Form 10-Q. The matters addressed in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations, withthe exception of the historical information presented, contain forward-lookingstatements involving risks and uncertainties. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of certain factors, including those set forth in Item 1A below andelsewhere in this report.

 

Effective December 3,2007, we changed our fiscal year end from December 31 to March 31. Asa result of this change, our transition period from January 1, 2007 to March 31,2007 is covered by this Transition Report, which is identical in all materialrespects to our Quarterly Report on Form 10-Q for the period ended March 31,2007, filed with the SEC on May 15, 2007. Our  new fiscal year will commence April 1,2008 and end on March 31, 2009.

 

## **Overview**

##  

Weprovide cable and wireless broadband access solutions through two businesssegments: our “Cable Solutions” segment and our “Wireless Solutions” segment.Our primary focus is now on our Cable Solutions segment, and significantly allof our internal resources are focused on enhancing our visibility in andpenetration of the cable market. The recent additions of James A. Chiddixas the new Vice Chairman of our board of directors and Wayne H. Davis asour new Chief Executive Officer validate our efforts and increase ourvisibility within the cable industry.

 

Ourproducts are designed to address four markets: Cable, Telecommunication,Utility and Wireless Internet Service Providers (“WISP”). Although we areengaged to various degrees in these distinct markets, some of our coretechnologies overlap with our respective solutions.

 

OurCable Solutions segment includes products that are used to deliver telephonyand data T1/E1 links to enterprise and cellular providers over cable’swireless HFC networks. Additionally, our “Spectrum Overlay” technology is usedto expand cable operators’ typical HFC network capacity in the “last mile” byup to two times in the downstream and up to four times in the upstream. OurCable Solutions segment includes the results of operations of XtendNetworks Ltd., an Israeli privately-held company, and its wholly-owned,United States-based subsidiary, Xtend Networks Inc. (collectively, “Xtend”).We purchased all of the outstanding capital stock of Xtend on June 30,2004 and consolidated its operations with our operations beginning July 1,2004. For a discussion of our acquisition of Xtend, see note 7 of our 2006annual Consolidated Financial Statements.

 

OurWireless Solutions segment includes products which enable utilities and othernetwork service providers to operate private wireless networks forcommunications, monitoring and Supervisory Control And Data Acquisition oftheir geographically disbursed, remote assets. Additionally, it includes ourWISP and telecommunications products which address the needs of rural serviceproviders to serve customers with wireless, high-speed data beyond the reach oftraditional terrestrial networks.

 

On March 23,2006, we closed the private placement of shares of common stock, a convertiblenote, a senior secured note and warrants to purchase common stock with Goldman,Sachs & Co. in exchange for $25,000,000 (the “2006 Financing”). In the2006 Financing we issued (a) 1,353,365 shares of our common stock, (b) a$10,000,000 10% Convertible Note (the “2006 Convertible Note”), (c) a$7,500,000 9.5% Senior Secured Note (the “Senior Secured Note”), and (d) warrantsto purchase 298,617 shares of our common stock, all of which were exercised in2006. Our net proceeds from the 2006 Financing were approximately $23,400,000.

 

On March 28,2007, we closed the private placement of a convertible note with Goldman, Sachs &Co. in exchange for $35,000,000 (the “2007 Convertible Note”), which included$17,500,000 of new funding and $17,500,000 of which we used to pay off the 2006Convertible Note and Senior Secured Note delivered in the 2006 Financing. Ournet proceeds from the 2007 Financing were approximately $17,350,000. See alsonote 7.

 

 

 

21

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**CriticalAccounting Principles**

 

Thediscussion and analysis of our financial condition and results of operations isbased upon our unaudited interim condensed consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates, judgments and assumptions that affect thereported assets and liabilities, revenues and expenses and related disclosureof contingent assets and liabilities at the date of the financial statements.Actual results may differ from these estimates, judgments and assumptions.

 

Oursignificant accounting principles are described in the notes to our 2006 annualconsolidated financial statements in the Annual Report on Form 10-K forthe year ended December 31, 2006. We determined the critical principles byconsidering accounting principles that involve the most complex or subjectivedecisions or assessments. We believe our most critical accounting principlesinclude the following:

 

***RevenueRecognition***

 

We generate revenues from sales of our products. As ofMarch 31, 2007, our revenues from services were not significant. Ourproducts are off-the-shelf products, sold “as is,” without further adjustmentor installation. When establishing a relationship with a new customer, we alsomay sell these products together as a package, in which case we typically shipproducts at the same time to the customer.

 

We record revenues from our products when (a) persuasiveevidence of an arrangement exists; (b) delivery has occurred and customeracceptance requirements have been met, if any, and we have no additionalobligations; (c) the price is fixed or determinable; and (d) collectionof payment is reasonably assured. Our standard sales terms generally do notinclude customer acceptance provisions. However, if there is a right of return,customer acceptance provision or uncertainty about customer acceptance, wedefer the associated revenue until we have evidence of customer acceptance.

 

Emerging Issues Task Force (“EITF”) No. 00-21, “RevenueArrangements with Multiple Deliverables,” addresses when and how an arrangementinvolving multiple deliverables should be divided into separate units ofaccounting. Our multiple deliverables arrangements are those arrangements withnew customers in which we sell our products together as a package. Because wedeliver these off-the-shelf products at the same time and the four revenuerecognition criteria discussed above are met at that time, the adoption of EITFNo. 00-21 had no impact on our financial position and results ofoperations.

 

We recognize revenues related to the exclusivityprovisions contained in the equipment purchase agreement with Arcadian Networks, Inc.(“ANI”) described in note 4 of our 2006 annual Consolidated FinancialStatements on a straight line basis, over the 10-year term of that agreement

 

***Inventory***

 

Weregularly monitor inventory quantities on hand and record a provision forexcess and obsolete inventory based primarily on our estimated forecast offuture product demand and production requirements. Although we make everyeffort to ensure the accuracy of our forecasts of future product demand, anysignificant unanticipated changes in demand or technological developments wouldsignificantly impact the value of our inventory and reported operating results.If actual market conditions are different from our assumptions, additionalprovisions may be required. Our estimate of future product demand may prove tobe inaccurate, in which case we may have understated or overstated theprovision required for excess and obsolete inventory. If we later determinethat our inventory is overvalued, we would be required to recognize such costsin our costs of sales at the time of such determination. If we later determinethat our inventory is undervalued, we may have overstated our costs of sales inprevious periods and would be required to recognize additional operating incomeonly when the undervalued inventory was sold.

 

Weadopted the provisions of the Financial Accounting Standards Board (“FASB”)Statement No. 151, “Inventory Costs” (“FASB 151”), as of January 1,2006, which did not have a material effect on our financial statements. FASB151 requires us to recognize abnormal idle facility expenses as current-periodcharges, and to allocate fixed production overhead costs to inventory based onnormal capacity of the production facility.

 

 

 

22

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***Extinguishment of Debt***

 

Asnoted above, in the 2007 Financing we repaid the 2006 Convertible Note andSenior Secured Note. We accounted for this repayment as “extinguishment of debt”under the Emerging Issues Task Force 96-19, “Debtor’s Accounting for aModification or Exchange of Debt Instruments” (“EITF 96-19”). The 2007Convertible Note was initially recorded at fair value, and that amount was usedto determine the debt extinguishment loss of $3,263,000 recognized as a resultof $2,231,000 unamortized accretion and $1,032,000 unamortized issuanceexpenses related to the 2006 Convertible Note and Senior Secured Note.

 

***Fair Value of Financial Instruments***

 

Thefair value of the financial instruments included in our working capital approximatescarrying value. The Syntek Promissory Note, the Senior Secured Note and the2006 Convertible Note delivered in the 2006 Financing and the 2007 ConvertibleNote delivered in the 2007 Financing are presented in the Balance Sheets as “Long-TermLiabilities,” at approximately their estimated fair value.

 

***Debt Issuance Costs***

 

Costsincurred in the issuance of the 2007 Convertible Note included cash payments tolegal advisors in the three months ended March 31, 2007. Costs incurred inthe issuance of the 2006 Convertible Note and Senior Secured Note to theCompany’s financial advisor included warrants to purchase shares of the Company’scommon stock and cash payments to legal and financial advisors in the yearended December 31, 2006. In the year ended December 31, 2006, thefair value of the warrants was determined based on the Black-Scholesoption-pricing model. Issuance cost are deferred and amortized as a componentof interest expense over the period from issuance through the first redemptiondate.

 

***Stock-Based Compensation***

 

Priorto January 1, 2006, we accounted for employees’ stock-based compensationunder the intrinsic value model in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) andrelated interpretations. In accordance with SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure.”

 

EffectiveJanuary 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-basedPayment” (“SFAS 123(R)”). SFAS 123 (R) supersedes APB 25 and relatedinterpretations and amends SFAS No. 95, “Statement of Cash Flows.”SFAS 123 (R) requires that awards classified as equityawards be accounted for using the grant-date fair value method. The fair valueof stock options is determined based on the number of shares granted and theprice of our common stock, and determined based on the Black-Scholes, MonteCarlo and the binomial option-pricing models, net of estimated forfeitures. Weestimated forfeitures based on historical experience and anticipated futureconditions. The Monte Carlo valuation model is used only for stock optionsgranted to executives in 2005 and 2006 if vesting is subject to market conditioncriteria.

 

In March 2005,the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB107”). SAB 107 provides supplemental implementation guidance on SFAS 123 (R), including guidance on valuationmethods, inventory capitalization of stock-based compensation cost, incomestatement effects, disclosures and other issues. SAB 107 requires stock-basedcompensation to be classified in the same expense line items as cashcompensation. We applied the provisions of SAB 107 in our adoption of SFAS 123 (R). In addition, we have reclassifiedstock-based compensation from prior periods to correspond to current periodpresentation within the same operating expense line items as cash compensationpaid to employees.

 

Weelected to recognize compensation cost for an option granted with serviceconditions that have graded vesting schedules using the graded vestingattribution method.

 

Weelected to adopt the modified prospective transition method permitted bySFAS 123(R). Under this transition method, we implemented SFAS 123(R) asof the first quarter of 2006 with no restatement of prior periods. Thevaluation provisions of SFAS 123 (R) apply to new awards and toawards modified, repurchased or cancelled after January 1, 2006.Additionally, we recognize compensation cost over the remaining service periodfor the portion of awards for which the requisite service has not been renderedusing the grant-date fair value of those awards as calculated for pro formadisclosure purposes under SFAS 123.

 

 

 

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In November 2005,FASB issued Staff Position No. SFAS 123(R)-3, “Transition ElectionRelated to Accounting for Tax Effects of Share-Based Payment Awards” (“SFAS123(R)-3”). We elected to adopt the alternative transition method provided inSFAS 123(R)-3 for calculating the tax effects of stock-based compensationpursuant to SFAS 123(R). The alternative transition method includessimplified methods to establish the beginning balance of the additional paid-incapital pool related to the tax effects of employee stock-based compensation,which is available to absorb tax deficiencies recognized after adoption ofSFAS 123(R).

 

As of January 1,2006, the cumulative effect of our adoption of SFAS 123(R) was notmaterial.

 

Weaccount  for equity instruments issued to third party serviceproviders (non-employees)  in accordance withthe fair value based on an option-pricing model, pursuant  tothe guidance in EITF 96-18 “Accounting for Equity Instruments That  Are Issued to Other Than Employees for Acquiring, or inConjunction with  Selling Goods or Services”. Thefair value of the options granted is revalued  overthe related service periods and recognized over the vesting period, using theBlack-Scholes model.

 

Expense related to stock-based compensation isincluded in the following line items in the Statements of Operations:

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands of U.S. $)**                     | ** ** |
| Cost of revenues           |       | $                                                | 18         |   | $ | 14 |   |
| Research and development   |       | $                                                | 130        |   | $ | 217 |   |
| Sales and marketing        |       | $                                                | 291        |   | $ | 469 |   |
| General and administrative |       | $                                                | 447        |   | $ | 1,281 |   |

 

**RecentAccounting Pronouncements**

 

In December 2006,FASB issued Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”).EITF 00-19-2 specifies that the contingent obligation to make future paymentsor otherwise transfer consideration under a registration payment arrangementshould be separately recognized and measured in accordance with SFAS No. 5,“Accounting for Contingencies.”EITF 00-19-2 is effective immediately for registration payment arrangements andthe financial instruments subject to those arrangements that are entered intoor modified subsequent to December 21, 2006. For registration paymentarrangements and financial instruments subject to those arrangements that wereentered into prior to December 21, 2006, the guidance in EITF 00-19-2 iseffective for fiscal years beginning after December 15, 2006. We do notexpect EITF 00-19-2 to have a material impact on our consolidatedfinancial statements.

 

In February 2007,FASB issued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”). This standard permits companies to choose to measuremany financial assets and financial liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. This statement will be effective for us as applicablebeginning January 1, 2008. We are currently evaluating the impact that theadoption of SFAS 159 would have on our consolidated financial statements.

 

In July 2006, FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax positiontaken, or expected to be taken, in a tax return. FIN 48 requires theaffirmative evaluation that is more-likely-than-not, based on the technicalmerits of a tax position, that an enterprise is entitled to economic benefitsresulting from positions taken in income tax returns. If a tax position doesnot meet the more-likely-than-not recognition threshold, the benefit of thatposition is not recognized in the financial statements. FIN 48 also requirescompanies to disclose additional quantitative and qualitative information intheir financial statements about uncertain tax positions. We adopted FIN 48 on January 1,2007, which did not have a material impact on our consolidated financialstatements.

 

 

 

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##  

## **Resultsof Operations**

##  

***Revenues***

 

Revenues decreased to $623,000in the three months ended March 31, 2007 from $2,369,000 in the threemonths ended March 31, 2006. This decrease in revenues was primarily dueto revenue of $161,000 compared to revenue of $1,800,000 from our WirelessSolutions segment for products sold to ANI in the three months ended March 31,2007 and 2006, respectively. ANI is a related party as discussed above in note3. Our sales for the Cable Solutions segment were $462,000 and $463,000 forproducts sold to a top five cable MSO in the three months ended March 31,2007 and 2006, respectively.

 

Our revenue is concentrated among relatively fewcustomers, as set forth in the following table. Though our principalrevenue-generating customers are likely to vary on a quarterly basis, weanticipate that our revenues will remain concentrated among a few customers forthe foreseeable future.

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Customer A                 |       | 72                                               | %          | 18 | % |
| Customer B (related party) |       | 26                                               | %          | 76 | % |

 

***Cost of Revenues***

 

Cost of revenues consists of component and materialcosts, direct labor costs, warranty costs and overhead related to manufacturingour products.

 

Cost of revenues decreased to $698,000 during thethree months ended March 31, 2007 from $1,810,000 during the three monthsended March 31, 2006. This decrease in cost of revenues was primarilyattributable to decreases in shipments of our products. Our gross margin duringthe three months ended March 31, 2007 decreased primarily due to thedecrease in shipment of our products together with flat fixed costs. Weanticipate that our gross margins will continue to fluctuate based on ourproduct and customer mix, revenue level and inventory valuations.

 

***Research and Development***

 

Our research and development expenses were $2,868,000and $2,461,000 during the three months ended March 31, 2007 and 2006,respectively. Approximately $2,206,000 and $1,135,000 of these expenses werefrom our Cable Solutions segment and approximately $662,000 and $1,326,000 ofthese expenses were from our Wireless Solutions segment for the three monthsended March 31, 2007 and 2006, respectively. These expenses consistprimarily of personnel, facilities, equipment and supplies and are charged tooperations as incurred. A majority of our research and development activitiesare conducted in our facility in Israel.

 

The increase in our research and development expensesin our Cable Solutions segment during the three months ended March 31, 2007compared to the three months ended March 31, 2006 resulted mainly from (a) anincrease in salaries and compensation from $613,000 to $1,226,000 due to theincrease in our Cable Solutions segment workforce compared to the workforce asof March 31, 2006 and (b) an increase of subcontractors, materialsand other professional fees from $139,000 to $445,000.

 

Given our focus on our Cable Solutions segment, weanticipate that we will need to increase our research and development workforcein the Cable Solutions segment in future periods to meet our customer demands.

 

The decrease in our research and development expensesin our Wireless Solutions segment during the three months ended March 31,2007 compared to the three months ended March 31, 2006 resulted mainlyfrom (a) a decrease in salaries and compensation from $615,000 to $336,000due to the decrease in our Wireless Solutions segment workforce compared to theworkforce as of March 31, 2006, (b) a decrease of subcontractors,materials and other professional fees from $269,000 to $74,000 and (c) decreasedcharges for stock-based compensation from $118,000 to $17,000.

 

 

 

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***Sales and Marketing***

 

Sales and marketing expenses decreased to $1,881,000during the three months ended March 31, 2007 compared to $2,643,000 duringthe three months ended March 31, 2006. Of these expenses, $1,724,000 and$1,561,000 were from our Cable Solutions segment in the three months ended March 31,2007 and 2006, respectively, and $157,000 and $1,082,000 were from our WirelessSolutions segment in the three months ended March 31, 2007 and 2006,respectively. Sales and marketing expenses consist of salaries and relatedcosts for sales and marketing employees, consulting fees and expenses fortravel, trade shows, market research, branding and promotional activities.

 

The increase in our sales and marketing expenses inour Cable Solutions segment during the three months ended March 31, 2007compared to the three months ended March 31, 2006 resulted mainly from anincrease in salaries and compensation from $775,000 to $982,000 due to theincrease in our Cable Solutions segment workforce compared to the workforce asof March 31, 2006. These amounts were partly offset by decreased chargesfor stock-based compensation from $328,000 to $288,000.

 

Given our focus on our Cable Solutions segment, weanticipate that our Cable Solutions segment sales and marketing workforce willincrease in future periods as we increase our efforts to penetrate the CableSolutions market and meet our customer demands.

 

The decrease in our sales and marketing expenses fromour Wireless Solutions segment in the three months ended March 31, 2007was mainly from (a) a decrease in salaries and compensation from $477,000to $61,000 due to the decrease in our Wireless Solutions segment workforcecompared to the workforce as of March 31, 2006, (b) decreased chargesfor stock-based compensation from $141,000 to $3,000, (c) a decrease intravel and entertainment expenses from $65,000 to $22,000, (d) a decreaseof subcontractors, materials and other professional fees from $45,000 to $6,000and (e) a decrease in overhead expenses from $245,000 to $43,000 relatedto the relocation of our sales and marketing support facilities of our WirelessSolutions segment from Palo Alto, California to Norcross, Georgia during 2006.Given this reduction and our general de-emphasis of our Wireless Solutionssegment, we anticipate that sales and marketing expenses of our WirelessSolutions segment will decrease in future periods.

 

***General and Administrative***

 

General and administrative expenses were $2,047,000compared to $3,009,000 during the three months ended March 31, 2007 and2006, respectively. Of these expenses, approximately $1,520,000 and $285,000were from our Cable Solutions segment and approximately $527,000 and $2,724,000were from our Wireless Solutions segment during the three months ended March 31,2007 and 2006, respectively. General and administrative expenses consistedprimarily of personnel and related costs for general corporate functions,including finance, accounting, implementation of the Sarbanes-Oxley Act of2002, strategic and business development and legal.

 

The decrease in general and administrative expensesduring the three months ended March 31, 2007 compared to the three monthsended March 31, 2006 was primarily due to (a) decreased charges forstock-based compensation from $1,281,000 to $447,000 and (b) a decrease inprofessional fees from $332,000 to $209,000.

 

We expect general and administrative expenses to behigher in the future as we continue to implement internal controls overfinancial reporting as required by the Sarbanes-Oxley Act and to execute ourstrategic plans and business development efforts.

 

***Financial Income (Expense), Net***

 

“Financial Income (expense), net” includes interestand investment income, foreign currency remeasurement gains and losses. Netinterest expense was $3,918,000 for the three months ended March 31, 2007compared to net interest expense of $269,000 for the three months ended March 31,2006. As a result of the extinguishment of the 2006 Convertible Note and SeniorSecured Note, we recorded $3,263,000 in the three months ended March 31,2007 as financial expenses consisting of $2,231,000 of unamortized accretionand $1,032,000 of unamortized issuance expenses. In addition we had increasedinterest expenses due to our amended Syntek Promissory Note, 2006 ConvertibleNote and Senior Secured Note. These increases were partially offset by interestincome derived mainly from our cash and short-term investment balances, andrecognition of an other-than-temporary impairment in our available-for-salesecurities of $0 and ($42,000) and realized losses of $0 and $31,000 for thethree months ended March 31, 2007 and 2006, respectively.

 

 

 

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We will incur increased interest expenses for theremainder of 2007 and beyond due to long-term debt issued in the 2007 Financingin which the 2007 Convertible Note bears an annual interest rate of 5% and dueto the amortization of deferred expenses incurred as part of the 2007Financing. Interest expenses also will increase given the accretion to thevalue of the $6,500,000 amended Syntek Promissory Note. We will recordaccretion of $2,533,000 throughout the term of the amended Syntek PromissoryNote, unless the note is cancelled, of which we recorded $323,000 during thethree months ended March 31, 2007.

 

***IncomeTaxes***

 

As of December 31, 2006, our Israeli subsidiarieshad net operating loss carryforwards of approximately $96,000,000. Thesecarryforwards have no expiration date.

 

Our Israeli subsidiaries have been granted “ApprovedEnterprise” status for several investment programs. The Approved Enterprisestatus entitles these subsidiaries to receive tax exemption periods, rangingfrom two to six years, on undistributed earnings commencing in the year inwhich the subsidiaries attain taxable income. In addition, this ApprovedEnterprise status provides a reduced corporate tax rate of between 10% to 25%(as opposed to the usual Israeli corporate tax rate of 29% for 2007) for theremaining term of the program on the plan’s proportionate share of income.

 

Since our Israeli subsidiaries have not achievedtaxable income, the tax benefits periods have not yet commenced. Thesubsidiaries’ losses are expected to offset certain future earnings of thesubsidiaries during the tax-exempt period; therefore, the utilization of thenet operating losses will generate no tax benefits. Accordingly, deferred taxassets from such losses have not been included in our 2006 annual consolidatedfinancial statements. The entitlement to the above benefits is conditioned uponthe subsidiaries fulfilling the conditions stipulated by the law, regulationspublished thereunder and the instruments of approval for the specificinvestments in approved enterprises.

 

**Liquidityand Capital Resources**

 

As of March 31, 2007, we had $31,154,000 of cash,cash equivalents and short-term investments.

 

Our consolidated financial statements are presented ona going concern basis, which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. We haveexperienced significant losses from operations since our incorporation. For theperiod ended March 31, 2007, we incurred a net loss of $11,039,000 and hadan accumulated deficit of $275,615,000. Our ability to continue as a goingconcern will depend upon our ability to raise additional capital or attainprofitable operations. In addition, we continue to seek to expand our revenuebase by adding new customers. Failure to secure additional capital or to expandour revenue base to achieve profitability, would likely result in depleting ouravailable funds and not being able to pay our obligations when they become due.The accompanying unaudited interim Consolidated Financial Statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that may result if we are unable to continue as a going concern.

 

During the three months ended March 31, 2007, netcash used in operations was $5,302,000, comprised mainly of our loss of$11,039,000, partially offset by (a) non-cash charges related todepreciation and amortization of $218,000, (b) stock-based compensation of$886,000, (c) financing expenses of $3,715,000 resulting from accretion ofthe amended Syntek Promissory Note, the 2006 Convertible Note and SeniorSecured Note delivered in the 2006 Financing and the 2007 Convertible Notedelivered in the 2007 Financing, (d) an increase of liability for employeerights upon retirement of $234,000, and (e) changes in other workingcapital accounts of $688,000.

 

During the three months ended March 31, 2006, netcash used in operations was $4,087,000, comprised mainly of our loss of$7,980,000, partially offset by (a) non-cash charges related todepreciation and amortization of $229,000, (b) financing expenses of  $365,000 resulting from accretion of theamended Syntek Promissory Note, 2006 Convertible Note and Senior Secured Note, (c) stock-basedcompensation of $1,981,000, (d) an increase of liability for employeerights upon retirement of $301,000, and (e) changes in other workingcapital accounts of $1,017,000.

 

During the three monthsended March 31, 2007, net cash provided by investing activities was$3,772,000 comprised of sales and maturities of our short-term investments netof $4,254,000 in purchases of short-term investments partially offset by$435,000 in purchases of property and equipment. During the three months ended March 31,2006, net cash provided by 

 

 

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investing activities was$3,674,000 comprised of $3,739,000 net of sales and purchases of our short-terminvestments partially offset by $34,000 in purchases of property and equipment.

 

Financing activities in the three months ended March 31,2007 were approximately $18,248,000 related to the 2007 Financing whichincluded the 2007 Convertible Note and proceeds we received upon the exerciseof stock options.  Financing activitiesin the three months ended March 31, 2006 were approximately $24,874,000and related to (a) the 2006 Financing, which included the issuance of ourcommon stock, the 2006 Convertible Note, the Senior Secured Note and warrantsto purchase our common stock, net of issuance cost and (b) proceeds wereceived upon the exercise of stock options. See note 7 above for additionalinformation about the 2007 Financing and the 2006 Financing.

 

We have purchase obligations to our suppliers that supportour operations in the normal cause of our business. The obligations require usto purchase minimum quantities of the suppliers’ products at a specified price.As of March 31, 2007 and December 31, 2006, we had approximately$2,929,000 and $1,136,000, respectively, of purchase obligations. Theseobligations are expected to become payable at various times through 2007.

 

**SubsequentEvents**

 

***Employment of Davidi Gilo, ourChairman of the Board of Directors***

 

On April 5,2007, we entered into an amended and restated employment agreement with DavidiGilo (the “2007 Gilo Agreement”), which replaced and superseded his employmentagreement executed in 2006.

 

Underthe 2007 Gilo Agreement, Mr. Gilo will continue to serve as our Chairmanof the board of directors (subject to approval of our stockholders and untilhis successor is duly appointed and elected). The 2007 Gilo Agreement has thesame three-year term as his 2006 agreement, with automatic renewals thereafterfor terms of one year each, subject to termination upon prior notice by eitherparty. In exchange for 20 hours of services per week, Mr. Gilo willreceive an annual base salary of $200,000, which will be reviewed on or before December 31,2007 and thereafter based on Mr. Gilo’s services and our financialresults. Mr. Gilo is eligible to receive employee benefits available toall employees, is eligible to participate in bonus plans that may be adopted byour board of directors and will be entitled to an additional annual bonus basedon his and our performance each year as determined by our board of directors orCompensation Committee.  In addition, Mr. Gilo is eligible for stockoptions that we award, and he shall accrue 30 days of paid vacation for each 12months of employment.

 

If we terminate hisemployment without “Cause” (as defined in the 2007 Gilo Agreement), all of Mr. Gilo’sunvested options will vest immediately and Mr. Gilo will receive aseverance payment equal to the greater of (a) the full amount ofcompensation that Mr. Gilo could have expected under the 2007 GiloAgreement (based on his total compensation (salary and bonus) earned in 2007)through the end of the term; or (b) the full amount of compensation that Mr. Gilocould have expected under the 2007 Gilo Agreement for 18 months (based on histotal compensation (salary and bonus) earned in 2007).

 

If we terminate hisemployment without Cause after the initial three-year term, all of Mr. Gilo’sunvested options will vest immediately and Mr. Gilo will receive aseverance payment equal to the full amount of the compensation that Mr. Gilocould have expected under the 2007 Gilo Agreement for 18 months (based on histotal compensation (salary and bonus) earned in 2007).

 

If we terminate hisemployment for Cause, Mr. Gilo will receive a severance payment equal tofull amount of the compensation that Mr. Gilo could have expected underthe 2007 Gilo Agreement for three months (based on his total compensation(salary and bonus) earned in 2007).

 

If Mr. Gilovoluntarily terminates his employment, Mr. Gilo will receive a severancepayment equal to the full amount of the compensation that Mr. Gilo couldhave expected under the 2007 Gilo Agreement for nine months (based on his totalcompensation (salary and bonus) earned in 2007).

 

***CostReduction Program***

 

On July 23, 2007,our management implemented a cost reduction program. In connection with thisprogram, we reduced our workforce by approximately 16% (when compared to theworkforce levels as of June, 2007) in the third quarter 

 

 

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of 2007. We recordedapproximately $400,000 in a one-time cash severance payment and relatedexpenses. This cost reduction did not require the termination of anycontractual obligations or require us to incur other material associated costs.

 

**Forward-Looking Statements**

 

You should readManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in conjunction with the consolidated financial statements andaccompanying notes appearing elsewhere in our Transition Report on Form 10-Q.The matters addressed in Management’s Discussion and Analysis of FinancialCondition and Results of Operations, with the exception of the historicalinformation presented, contain forward-looking statements involving risks and uncertainties,as well as assumptions that, if they do not fully materialize or proveincorrect, could cause our business and results of operations to differmaterially from those expressed or implied by such forward-looking statements.Such forward-looking statements include:

 

·                  our belief that ourability to continue as a going concern will depend upon our ability to raiseadditional capital or attain profitable operations;

 

·                  our belief that failure tosecure additional capital or to expand our revenue base to achieve profitabilitywould likely result in depleting our available funds and not being able to payour obligations when they become due;

 

·                  our belief that our most criticalaccounting policies include policies related to revenue recognition, inventory,extinguishment of debt, fair value of financial instruments, debt issuancecosts and stock-based compensation;

 

·                  our expectation that EITF00-19-2 will not have a material impact on our consolidated financialstatements;

 

·                  our anticipation that ourrevenues will remain concentrated among a few customers for the foreseeablefuture;

 

·                  our anticipation that ourgross margins will continue to fluctuate based on our product and customer mix,revenue level and inventory valuations;

 

·                  our anticipation that wewill need to increase our research and development workforce in the CableSolutions segment in future periods to meet our customer demands;

 

·                  our anticipation that ourCable Solutions segment sales and marketing workforce will increase in futureperiods as we increase our efforts to penetrate the Cable Solutions market andmeet our customer demands;

 

·                  our anticipation thatsales and marketing expenses of our Wireless Solutions segment will decrease infuture periods given the reduction in our expenses related to the relocation ofour sales and marketing support facilities from California to Georgia and ourgeneral de-emphasis of our Wireless Solutions segment;

 

·                  our expectation thatgeneral and administrative expenses will be higher in the future as we continueto implement internal controls over financial reporting as required by theSarbanes-Oxley Act of 2002 and to execute our strategic plans and businessdevelopment efforts;

 

·                  implement internalcontrols over financial reporting as required by the Sarbanes-Oxley Act of 2002and to execute our strategic plans and business development efforts;

 

·                  our expectation that thelosses of our Israeli subsidiaries will offset certain future earnings of thesubsidiaries, if attained, during the tax-exempt period (provided under Israelilaw);and

 

·              our belief as to the payment ofpurchase obligations that are expected to become payable at various timesthrough 2007.

 

You can identify theseand other forward-looking statements by the use of words such as “may,” “will,”“should,” “could,” “intend,” “expect,” “plan,” “estimate,” “project,” “anticipate,”“believe,” “potential,” “continue,” or the negative of such terms, or othercomparable terminology. The risks, uncertainties and assumptions referred toabove that could cause our actual results to differ materially from the resultsexpressed or implied by such forward-looking statements include those set 

 

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forth under Item 1Abelow and the risks, uncertainties and assumptions discussed from time to timein our other public filings and public announcements. All forward-lookingstatements included in this document are based on information available to usas of the date hereof, and we assume no obligation to update theseforward-looking statements.

 

**Item 3.****           ****Quantitative and QualitativeDisclosures about Market Risk**

 

***We are exposed to financial marketrisks including changes in interest rates and foreign currency exchange rates.Substantially all of our revenue and capital spending is transacted in UnitedStates dollars, although a substantial portion of the cost of our operations,relating mainly to our personnel and facilities in Israel, is incurred in NewIsraeli Shekels (“NIS”). We have not engaged in hedging transactions to reduceour exposure to fluctuations that may arise from changes in foreign exchangerates. In the event of an increase in inflation rates in Israel, or ifappreciation of the NIS occurs without a corresponding adjustment in ourdollar-denominated revenues, our results of operation and business could bematerially harmed.***

*** ***

***As of March 31, 2007, we hadcash, cash equivalents and short-term investments of $31,154,000. Substantiallyall of these amounts consisted of corporate and government fixed incomesecurities and money market funds that invest in corporate and government fixedincome securities that are subject to interest rate risk. We place ourinvestments with high credit quality issuers and by policy limit the amount ofthe credit exposure to any one issuer.***

*** ***

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

*** ***

***While all our cash equivalents andshort-term investments are classified as “available-for-sale,” we generallyhave the ability to hold our fixed income investments until maturity andtherefore we would not expect our operating results or cash flows to beaffected to any significant degree by the effect of a sudden change in marketinterest rates on our securities portfolio. We may not be able to obtainsimilar rates after maturity as a result of fluctuating interest rates. We donot hedge any interest rate exposures.***

*** ***

**QuantitativeInterest Rate Disclosure as of March 31, 2007**

 

***If market interest rates were to increaseon March 31, 2007 immediately and uniformly by 10%, the fair value of theportfolio would decline by approximately $12,000, or approximately 0.04% of thetotal portfolio (approximately 0.03% of total assets). Assuming that theaverage yield to maturity on our portfolio at March 31, 2007 remainsconstant throughout the second quarter of 2007 and assuming that our cash, cashequivalents and short-term investments balances at March 31, 2007 remainconstant for the duration of the second quarter of 2007, interest income forthe second quarter of 2007 would be approximately $326,000. Assuming a declineof 10% in the market interest rates at March 31, 2007, interest income forthe second quarter of 2007 would be approximately $383,000, which represents adecrease in interest income of approximately $28,000. The decrease in interestincome will result in a decrease of the same amount to net income and cashflows from operating activities for the three months ended March 31, 2007.These amounts are determined by considering the impact of the hypotheticalinterest rates on our cash equivalents and available-for-sale securities at March 31,2007 over the remaining contractual lives.***

*** ***

**Item 4.****           ****Controls and Procedures**

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report. Based on suchevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of such period, our disclosure controls andprocedures were effective to ensure that information we are required todisclose in reports that we file under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission rules and forms.

 

There have not been any changes in our internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter to which thisreport relates that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

 

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**PART II.****       ****OTHER INFORMATION**

 

**Item 1A.****        ****Risk Factors**

 

Ourbusiness is subject to substantial risks, including the risks describedbelow.  The risk factors described belowwere accurate at the time that we filed our Form 10-Q Quarterly Report forthe quarter ended March 31, 2007. We have not undertaken to revise these risk factors for the purpose ofthis Transition Report.  You should referto the risk factors in our Form 10-Q Quarterly Report for the quarterended September 30, 2007, which contains the risk factors as updatedthrough our last calendar quarter.

 

**We havea history of significant losses, expect future losses and may never achieve orsustain profitability.**

 

We have incurredsignificant losses since our inception, and we expect to continue to incurlosses for the foreseeable future. We incurred losses of $11,039,000 for thethree months ended March 31, 2007 and as of that date our accumulated deficitwas $275,615,000. Our revenues and gross margins may not grow or even continueat their current levels and may decline even further. If our revenues do notrapidly increase, or if our expenses increase at a greater pace than ourrevenues, we will never become profitable.

 

**We havewritten down and may need to further write-down our inventory in the future ifour sales levels do not match our expectations, or if selling prices declinemore than we anticipate, which could adversely impact our operating results.**

 

We operate in an industrythat is characterized by intense competition, supply shortages or oversupply,rapid technological change, unpredictable sales patterns, declining averageselling prices and rapid product obsolescence, all of which make it morechallenging to effectively manage our inventory. In addition, some of thecomponents we require have long lead-times and we are required to order orbuild inventory well in advance of the time of our anticipated sales.

 

Our inventory is statedat the lower of cost or market value. Determining market value of our inventoryrequires numerous judgments, including, but not limited to, judgments regardingaverage selling prices and sales volumes for future periods. We primarilyutilize estimated selling prices for measuring any potential declines in marketvalue below cost. When market value is determined to be below cost, we makeappropriate allowances to reduce the value of inventories to net realizedvalue. We may reduce the value of our inventory when we determine thatinventory is slow moving, obsolete, excessive or if the selling price of theproduct is insufficient to cover product costs and selling expenses.

 

In this regard, ourinventory increased substantially in 2005 because sales were substantially lessthan our anticipated demand and we were required to make advance inventorypurchase commitments for anticipated sales. Accordingly, we recorded a writedown of inventory and non-cancelable purchase commitments of $424,000 and$2,050,000 for the years ended December 31, 2006 and 2005, respectively.

 

If our sales do notincrease, the sales price of our products decrease or we are otherwise unableto control inventory levels consistent with actual demand, we may be requiredto write down additional inventory. Any such write-down would adversely affectour operating results in future periods.

 

**We mayhave insufficient capital to execute our business plan.**

 

On March 28, 2007,we closed a financing of $35,000,000 with Goldman, Sachs & Co., asfurther described in note 7. In the 2007 Financing, we delivered the 2007Convertible Note, $17,500,000 of which was used to payoff the outstanding 2006Convertible Note and the Senior Secured Note issued to Goldman, Sachs &Co. in the 2006 Financing. Following this pay off and payment of issuanceexpenses , our net proceeds were $17,350,000. Notwithstanding the 2007Financing, we may need additional capital to execute our business plan. If weare unsuccessful in securing additional cash, either through additional equityand/or debt financings or increased revenues, we may not be able tosuccessfully execute our business plan.

 

**If wedefault under the 2007 Convertible Note delivered to Goldman, Sachs &Co., the principal and accrued interest would become due and payable whichwould substantially harm our cash position and business prospects.**

 

On March 28, 2007,we closed the 2007 Financing which included delivery of the 2007 ConvertibleNote in the principal amount of $35,000,000. The 2007 Convertible Note containsevents of default that, if triggered, would require us to 

 

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pay the principal andaccrued interest under such note immediately (after the expiration ofapplicable cure periods). If an event of default occurs under the 2007Convertible Note and the holder declares all outstanding principal and interestimmediately due and payable, our cash position and business prospects would besubstantially harmed.

 

**If wefail to achieve significant market penetration and customer acceptance of ourcable products, our prospects would be substantially harmed.**

 

The market for broadbandproducts in the cable industry is extremely competitive, subject to drastictechnological changes, changes in capital expenditure budgets and highlyfragmented. Our products in the Cable Solutions segment are new and relativelyunknown; accordingly, we have not generated significant revenue in thissegment. We have only recently shipped our first commercial orders for our 3GHzSpectrum Overlay solution to two systems of a top MSO. Other than these orders,we have only begun to install our 3GHz Spectrum Overlay products with customersin field trials. There can be no assurance that our installations of our cableproducts will be successful. As some of our cable products continue to be in adevelopment stage, we may face challenges such as market resistance to newproducts, perceptions regarding customer support and quality control.

 

We will generatesignificant sales only if we are able to penetrate the market and create marketshare in this industry. If we are unable to do so, our business would be harmedand our prospects significantly diminished.

 

**Becausesubstantially all of our revenues are generated in United States dollars whilea portion of our expenses are incurred in New Israeli Shekels, our results ofoperations could be seriously harmed if the rate of inflation in Israel exceedsthe rate of devaluation of the New Israeli Shekel against the United Statesdollar.**

 

Our functional currencyis the United States dollar. We generate substantially all of our revenues inUnited States. dollars, but we incur a substantial portion of our expenses,principally salaries and related personnel expenses related to research anddevelopment, in New Israeli Shekels (“NIS”). As a result, we are exposed to therisk that the rate of inflation in Israel will exceed the rate of devaluationof the NIS in relation to the dollar or that the timing of this devaluationlags behind inflation in Israel.

 

**Oursuccess will depend on future demand for additional bandwidth by MSOs and theircustomers and the willingness and ability of MSOs to substantially increaseavailable bandwidth on their networks using our alternative technologysolution.**

 

Because our cableproducts expand available bandwidth over existing infrastructure, demand forthese products depends on demand for additional bandwidth by MSOs and theircustomers. The scope and timing of customer demand for additional bandwidth isuncertain and hard to predict. The factors influencing this demand includecompetitive offerings, applications availability, pricing models, costs,regulatory requirements and the success of initial roll-outs.

 

For our cable products tobe sold in significant quantities, MSOs also must be willing and able tosubstantially increase the available bandwidth on their networks. MSOs may notbe willing or able to develop additional services and revenue streams tojustify the deployment of our technology. If the future demand for bandwidth isinsubstantial, is addressed by alternative technologies or does not develop inthe near future, our prospects would be adversely affected.

 

**We havenot yet produced or deployed our cable products in high volumes.**

 

We have not yet producedour Spectrum Overlay solutions in high volumes and there may be challenges andunexpected delays, such as quality control issues, in our attempts to increasevolume and lower production costs. Our long-term success depends on our abilityto produce high quality products at a low cost and, in particular, to reducethe production cost of our cable products designed for residential use.

 

Because we have not yetdeployed our Spectrum Overlay solutions in high volumes, there is significanttechnology risk associated with any such future deployment. We cannot be surethat any such high volume deployment would be successful.

 

 

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**Ourfuture growth depends on market acceptance of several emerging broadbandservices, on the adoption of new broadband technologies and on several otherbroadband industry trends.**

 

Future demand for ourbroadband products will depend significantly on the growing market acceptanceof several emerging broadband services, including digital video,video-on-demand, high definition television, very high-speed data services andvoice-over-internet protocol (“VoIP”) telephony. The effective delivery ofthese services will depend in part on a variety of new network architectures,such as fiber-to-the premises networks, video compression standards such asMPEG-4 and Microsoft’s Windows Media 9, the greater use of protocols such as IPand the introduction of new consumer devices, such as advanced set-top boxesand digital video recorders. If adoption of these emerging services and/ortechnologies is not as widespread or as rapid as we expect, our net salesgrowth would be materially and adversely affected.

 

Furthermore, othertechnological, industry and regulatory trends will affect the growth of ourbusiness. These trends include the following:

 

·                                          convergence, or the desire of certainoperators to provide a combination of video, voice and data services toconsumers, also known as the “triple play;”

 

·                                          the use of digital video by businessesand governments;

 

·                                          the privatization of state owned telecommunicationcompanies in other countries;

 

·                                          efforts by regulators and governments inthe United States and abroad to encourage the adoption of broadband and digitaltechnologies; and

 

·                                          the extent and nature of regulatoryattitudes toward such issues as competition between operators, access by thirdparties to networks of other operators and new services such as VoIP.

 

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

 

**We willneed to develop distribution channels to market and sell our cable products.**

 

Our Spectrum Overlaysolutions are in the early stages of commercialization. We currently havelimited relationships with potential customers and distributors as well aslimited sales staff. We will be successful only if we are able to developdistribution channels to market and sell our cable products in sufficientvolumes.

 

To develop such channelsand market and sell our cable products, we need to grow our sales and marketingteam, many of whom will be based in the United States. It may be difficult forus to hire and retain additional qualified personnel. Integrating newpersonnel, particularly United States based personnel, may be challenging froma culture and logistics perspective because most of our employees currently arebased in Israel.

 

We currently have limitedexposure to global business opportunities, and will not be able to takeadvantage of meaningful potential global demand for our products unless anduntil we are able to develop meaningful global distribution channels andstrategies.

 

**Becauseof our long product development process and sales cycle, we may continue toincur substantial expenses without sufficient revenues that could cause ouroperating results to fluctuate.**

 

A customer’s decision topurchase our products typically involves a significant technical evaluation,formal internal procedures associated with capital expenditure approvals andtesting and acceptance of new systems that affect key operations. For these andother reasons, the sales cycle associated with our systems can be lengthy andsubject to a number of significant risks, over which we have little or nocontrol. Because of the growing sales cycle and the likelihood that we may relyon a small number of customers for our revenues, our operating results would beseriously harmed if such revenues do not materialize when anticipated, or atall.

 

 

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**If telecommunications serviceproviders and systems integrators do not promote and purchase our products, orif the telecommunications equipment market does not grow, our business will beseriously harmed.**

 

Telecommunicationsservice providers continually evaluate alternative technologies, includingdigital subscriber line, fiber and cable. If service providers or systemsintegrators do not emphasize systems that include our products, choose toemphasize alternative technologies or promote systems of our competitors, ourbusiness would be seriously harmed.

 

Market conditions remaindifficult and capital spending plans are often constrained. It is likely thatfurther industry restructuring and consolidation will take place. Companiesthat have historically not had a large presence in the broadband accessequipment market have expanded their market share through mergers andacquisitions. The continued consolidation of our competitors could have asignificant negative impact on us. Further, our competitors may bundle theirproducts or incorporate functionality into existing products in a manner thatdiscourages users from purchasing our products or which may require us to lowerour selling prices resulting in lower gross margins.

 

If the telecommunicationsmarket, and in particular the market for broadband access equipment, does notimprove and grow, our business would be substantially harmed.

 

**If thecommunications, Internet and cable television industries do not grow and evolvein a manner favorable to our business strategy, our business may be seriouslyharmed.**

 

Our future successdepends upon the growth of the communications industry, the cable televisionindustry and, in particular, the Internet. These markets continue to evolverapidly because of advances in technology and changes in customer demand. Wecannot predict growth rates or future trends in technology development. It ispossible that cable operators, telecommunications companies or other suppliersof broadband services will decide to adopt alternative architectures ortechnologies that are incompatible with our current or future products. If weare unable to design, develop, manufacture and sell products that incorporateor are compatible with these new architectures or technologies, our business willsuffer. Also, decisions by customers to adopt new technologies or products areoften delayed by extensive evaluation and qualifications processes and canresult in delays of current products.

 

In addition, thederegulation, privatization and economic globalization of the worldwidecommunications market, which resulted in increased competition and escalatingdemand for new technologies and services, may not continue in a mannerfavorable to us or our business strategies. In addition, the growth in demand forInternet services and the resulting need for high-speed or enhancedcommunications products may not continue at its current rate or at all.

 

**The lossof one or more of our key customers would result in a loss of a significantamount of our revenues and adversely affect our business.**

 

A relatively small numberof customers account for a large percentage of our revenues, as set forth inthe table below:

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Customer A                 |       | 72                                     | %          | 18 | % |
| Customer B (related party) |       | 26                                     | %          | 76 | % |

 

We expect that we willcontinue to depend on a limited number of customers for a substantial portionof our revenues in future periods. The loss of a major customer could seriouslyharm our ability to sustain revenue levels, which would seriously harm ouroperating results.

 

In this regard, sales toCustomer B in the year ended December 31, 2006 accounted for the vastmajority of our sales during that year. This customer was formed in 2006 andhas a very limited history of operations, profitable or otherwise. If thiscustomer is not successful in operating its business, or if sales to thiscustomer are lower than our expectations, our business could be harmed. We havedesigned products for our Wireless Solutions segment to meet the specificationsof Customer B, based on that customer’s assessment of the utility sector.Sales in our Wireless Solutions segment could be adversely affected ifCustomer B has not accurately assessed the needs of the utility sector.

 

 

 

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Notwithstanding theforegoing, as sales to Customer B were made by our Wireless Solutionssegment, if this customer is not successful, the effect to us will be temperedgiven the refocus of our internal resources on our Cable Solutions segment. Inthis regard, we expect that a significant source of our revenues in the comingyears will be derived from our Cable Solutions segment rather than our WirelessSolutions segment.

 

**We maynot be able to successfully operate businesses that we may acquire, in acost-effective and non-disruptive manner and realize anticipated benefits.**

 

We may exploreinvestments in or acquisitions of other companies, products or technologies,including companies or technologies that are not complementary or related to ourcurrent solutions. We ultimately may be unsuccessful in operating and/orintegrating an acquired company’s personnel, operations, products andtechnologies into our business. These difficulties may disrupt our ongoingbusiness, divert the time and attention of our management and employees andincrease our expenses.

 

Moreover, the anticipatedbenefits of any acquisition may not be realized or may not be realized in thetime period we expect. Future acquisitions could result in dilutive issuancesof equity securities, the incurrence of debt, contingent liabilities oramortization expenses related to goodwill and other identifiable intangibleassets and the incurrence of large and immediate write-offs, any of which couldseriously harm our business. In addition, we could spend significant resourcesin searching for and investigating new business opportunities, and ultimatelymay be unsuccessful in acquiring new businesses.

 

**Wedepend on cable and telecommunications industry capital spending for ourrevenue and any decrease or delay in such spending would adversely affect ourprospects.**

 

Demand for our productswill depend on the size and timing of capital expenditures bytelecommunications service providers and MSOs. These capital spending patternsare dependent upon factors including:

 

·              theavailability of cash or financing;

 

·              budgetaryissues;

 

·              regulationand/or deregulation of the telecommunications industry;

 

·              competitivepressures;

 

·              alternativetechnologies;

 

·              overalldemand for broadband services, particularly relatively new services such asVoIP;

 

·              industrystandards;

 

·              thepattern of increasing consolidation in the industry; and

 

·              generalconsumer spending and overall economic conditions.

 

If MSOs andtelecommunications service providers do not make significant capital expenditures,our prospects would be adversely affected.

 

**Ourparticipation or lack of participation in industry standards groups mayadversely affect our business.**

 

We do not participate inthe standards process of the Cable Television Laboratories, Inc., a cableindustry consortium that establishes cable technology standards and administerscompliance testing. In the future, we may determine to join or not join otherstandards or similar organizations. Our membership in these organizations coulddilute our proprietary intellectual property rights in our products while ourfailure to participate in others could jeopardize acceptance of any of ourproducts that do not meet industry standards.

 

 

 

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**Productstandardization, as may result from initiatives of MSOs and the wirelessindustry could adversely affect our prospects.**

 

Product standardizationinitiatives encouraged by MSOs and telecommunications companies may adverselyaffect revenues, gross margins and profits. In the past, standardizationefforts by major MSOs have negatively impacted equipment vendors by leading toequipment obsolescence, commoditization and reduced margins. If our products donot comply with future standards, our prospects could be adversely affected.

 

**Since wereduced our workforce in 2005, our research and development efforts couldcontinue to be harmed.**

 

We implemented a costreduction program in 2005 by reducing our workforce, which resulted in areduction of our workforce of approximately 16%. This reduction has had thelargest effect on our research and development activities. Our ability tofurther develop and market our products may be limited if we have notaccurately predicted the appropriate workforce requirements for our researchand development efforts. In this regard, we are currently experiencingdifficulty in hiring skilled research and development personnel in Israel. Ifthis difficulty continues in the foreseeable future, our research anddevelopment efforts would be harmed.

 

**Competitionmay result in lower average selling prices, and we may be unable to reduce ourcosts at offsetting rates, which may impair our ability to achieveprofitability.**

 

There has beensignificant price erosion in the broadband equipment field. We expect thatcontinued price competition among broadband access equipment and systemssuppliers will reduce our gross margins in the future. We anticipate that theaverage selling prices of broadband access systems will continue to decline asproduct technologies mature. We may be unable to reduce our manufacturing costsin response to declining average per unit selling prices. Our competitors maybe able to achieve greater economies of scale and may be less vulnerable to theeffects of price competition than we are. These declines in average sellingprices will generally lead to declines in gross margins and profitability forthese systems. If we are unable to reduce our costs to offset declines inaverage selling prices, we may not be able to achieve or maintainprofitability.

 

**Ourquarterly operating results fluctuate, which may cause our share price todecline.**

 

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

 

·                                          the uncertain timing and level of marketacceptance for our systems and the uncertain timing and extent of rollouts ofbroadband access equipment and systems by the major service providers;

 

·                                          the fact that we often recognize asubstantial proportion of our revenues in the last few weeks of each quarter;

 

·                                          the ability of our existing and potentialdirect customers to obtain financing for the deployment of broadband accessequipment and systems;

 

·                                          the mix of products sold by us and themix of sales channels through which they are sold;

 

·                                          reductions in pricing by us or ourcompetitors;

 

·                                          global economic conditions;

 

·                                          the effectiveness of our systemintegrator customers in marketing and selling their network systems equipment;

 

·                                          changes in the prices or delays indeliveries of the components we purchase or license; and

 

·                                          any acquisitions or dispositions we mayeffect.

 

 

 

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A delay in therecognition of revenue, even from one customer, could have a significantnegative impact on our results of operations for a given period. Also, becauseonly a small portion of our expenses vary with our revenues, if revenue levelsfor a quarter fall below our expectations, we would not be able to timelyadjust expenses accordingly, which would harm our operating results in thatperiod. We believe that period-to-period comparisons of our results ofoperations are not meaningful and should not be relied upon as indicators offuture performance. If our operating results fall below the expectations ofinvestors in future periods, our share price would likely decline.

 

**Becausewe operate in international markets, we are exposed to additional risks whichcould cause our international sales to decline and our foreign operations tosuffer.**

 

Our research anddevelopment facilities are located in Israel. Our reliance on internationalsales, operations and suppliers exposes us to foreign political and economicrisks, which may impair our ability to generate revenues. These risks include:

 

·              economic,inflation and political instability;

 

·              terroristacts, international conflicts and acts of war;

 

·              ourinternational customers’ ability to obtain financing to fund their deployments;

 

·              changesin regulatory requirements and licensing frequencies to service providers;

 

·              importor export licensing requirements and tariffs;

 

·              laborshortages or stoppages;

 

·              traderestrictions and tax policies; and

 

·              limitedprotection of intellectual property rights.

 

Any of the foregoingdifficulties of conducting business internationally could seriously harm ourbusiness.

 

**Conditionsin Israel affect our operations and could limit our ability to produce and sellour systems.**

 

Our research anddevelopment and final testing and assembly facilities, a majority of ouremployees and some of our contract manufacturers are located in Israel.Political, economic and military conditions in Israel directly affect ouroperations. Since the establishment of the State of Israel in 1948, a number ofarmed conflicts have taken place between Israel and its Arab neighbors and astate of hostility, varying in degree and intensity, has led to security andeconomic problems for Israel. Hostilities within Israel have dramaticallyescalated in recent years, which could disrupt our operations. In addition, thewars in Iraq and Afghanistan and the current military and political presence ofthe United States or its allies in Iraq and Afghanistan could cause increasinginstability in the Middle East and further disrupt relations between Israel andits Arab neighbors. We could be adversely affected by any major hostilitiesinvolving Israel, the interruption or curtailment of trade between Israel andits trading partners, a significant increase in inflation or a significantdownturn in the economic or financial condition of Israel. Moreover, severalcountries still restrict business with Israel and with Israeli companies. Wecould be adversely affected by restrictive laws or policies directed towardsIsrael or Israeli businesses.

 

Our Chief FinancialOfficer, one of our directors and a majority of our employees are based inIsrael, and many of them are currently obligated to perform annual reserve dutyand are subject to being called to active duty at any time under emergencycircumstances. We cannot assess the full impact of these requirements on ourworkforce or business if conditions should change, and we cannot predict theeffect on us of any expansion or reduction of these obligations.

 

**Becausewe generally do not have contracts with our customers, our customers candiscontinue purchases of our systems at any time, which could adversely affectfuture revenues and operating results.**

 

We generally sell ourbroadband access equipment and systems based on individual purchase orders. Ourcustomers generally are not obligated by agreements to purchase our systems,and the agreements we have entered into, other than our 

 

 

 

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agreement with ANI, donot obligate our customers to purchase a minimum number of systems. Ourcustomers can generally cancel or reschedule orders on short notice anddiscontinue using our systems at any time. Further, having a successful fieldsystem trial does not necessarily mean that the customer will order large volumesof our systems. The reduction, delay or cancellation of orders from one or moreof our customers could seriously harm our operating results.

 

**Theeffects of regulatory actions could impact spectrum allocation and frequenciesworldwide and cause delays or otherwise negatively impact the growth anddevelopment of the broadband market, which would adversely affect our business.**

 

Countries worldwide areconsidering or are in the process of allocating frequencies for wirelessapplications, but not all markets have done so. If the United States and/orother countries do not provide sufficient spectrum for wireless applications orreallocate spectrum in the wireless frequency bands for other purposes, ourcustomers may delay or cancel deployments in broadband wireless, which couldseriously harm our business. Further, if our customers are unable to obtainlicenses or sufficient spectrum in the wireless frequency bands our businesscould be seriously harmed.

 

The cable industry isalso heavily regulated and changes in the regulatory landscape may adverselyaffect our business. For example, cable operators are currently required tocarry a significant number of analog channels. A reduction or elimination ofthis requirement may free bandwidth for these operators and reduce thepotential market for our products.

 

**Competitionmay decrease our market share, net revenues and gross margins, which couldcause our stock price to decline.**

 

The market for broadbandaccess equipment and systems is intensely competitive, rapidly evolving andsubject to rapid technological change. The main competitive factors in ourmarkets include:

 

·              productperformance, features and reliability;

 

·              price;

 

·              stability;

 

·              scopeof product line;

 

·              salesand distribution capabilities;

 

·              technicalservice and support;

 

·              relationships,particularly those with system integrators and operators; and

 

·              industrystandards.

 

Certain of ourcompetitors 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 havelonger operating histories, greater name recognition, broader product lines andestablished relationships with system integrators and service providers. Ourprimary competitors are Scientific Atlanta (purchased by Cisco Systems, Inc.in 2006); Motorola, Inc.; BigBand Networks, Inc.; C-Cor Incorporatedand Narad Networks, Inc. Most of these competitors have existingrelationships with one or more of our prospective customers. In the cableindustry, our cable offerings face competition from technologies such asdigital set-top boxes, high-end compression technologies and DVRs. For ourbroadband wireless offerings, we face competition from technologies such asdigital subscriber line, fiber and cable. Furthermore, the move toward openstandards may increase the number of operators who will offer new services,which in turn may increase the number of competitors and drive down the capitalexpenditures per subscriber deployed. We may not be able to competesuccessfully against our current and future competitors, and competitivepressures could seriously harm our business.

 

 

 

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**If theadoption of broadband wireless technology continues to be limited, we will notbe able to sustain or expand our wireless business.**

 

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

 

While we continue tooperate our Wireless Solutions segment, our primary focus is now on our CableSolutions segment. Accordingly, we may consider a variety of alternatives toWireless Solutions segment, including the sale, divestiture, license orrestructuring of a substantial portion or all of our current wireless networktechnology or assets. If demand for products in our Wireless Solutions segmentincreases, we may not have sufficient products (either in terms of quantity ordifferent product lines) to address the needs of the wireless market due to insufficientproduction capabilities or research and development expertise.

 

**Hardwaredefects or firmware errors could increase our costs and impair the marketacceptance of our systems, which would adversely affect our future operatingresults.**

 

Our systems occasionallycontain certain defects or errors. This may result either from defects incomponents supplied by third parties or from errors or defects in our firmwareor hardware that we have not detected. We have in the past experienced, and mayexperience from time-to-time, defects in new or enhanced products and systemsafter shipments, or defects in deployed systems. This could occur in connectionwith stability or other performance problems. Our customers integrate oursystems into their networks with components from other vendors. Accordingly,when problems occur in a network system, it may be difficult to identify thecomponent that caused the problem. Regardless of the source of these defects orerrors, we will need to divert the attention of our engineering personnel fromour product development efforts to address the defect or error. We haveincurred in the past and may again incur significant warranty and repair costsrelated to defects or errors, and we also may be subject to liability claims fordamages related to these defects or errors. The occurrence of defects orerrors, whether caused by our systems or the components of another vendor, mayresult in significant customer relationship problems and injury to ourreputation and may impair the market acceptance of our systems.

 

**Wedepend on contract manufacturers and third party equipment and technologysuppliers, and these manufacturers and suppliers may be unable to fill ourorders or develop compatible, required technology on a timely basis, whichwould result in delays that could seriously harm our results of operations.**

 

We currently haverelationships with a limited number of contract manufacturers for themanufacturing of our products, substantially all of whom are located in Israeland Taiwan. These relationships may be terminated by either party with littleor no notice. If our manufacturers are unable or unwilling to continuemanufacturing our systems in required volumes, we would have to identifyqualified alternative manufacturers, which would result in delays causing ourresults of operations to suffer. Our limited experience with thesemanufacturers and lack of visibility as to the manufacturing capabilities ofthese companies if our volume requirements significantly increase does not provideus with a reliable basis on which to project their ability to meet deliveryschedules, yield targets or costs. If we are required to find alternativemanufacturing sources, we may not be able to satisfy our productionrequirements at acceptable prices and on a timely basis, if at all. Anysignificant interruption in supply would affect the allocation of systems tocustomers, which in turn could seriously harm our business. In addition, wecurrently have no formal written agreement with a manufacturer for our modemproducts. Our current inventory of modems is unlikely to fulfill anticipateddemand, and we will therefore be required to find a manufacturer in the nearfuture. Our inability to enter into an agreement with a manufacturer for ourmodems would harm our business.

 

In addition to sales tosystem integrators, we also sell in some instances directly to serviceproviders. Such direct sales require us to resell equipment to serviceproviders manufactured by third party suppliers and to integrate this equipmentwith the equipment we manufacture. We are particularly dependent on third partyradio suppliers in selling our 3.5GHz and other products. We currently havelimited relationships with third party suppliers. If we are unable to establishmeaningful relationships with suppliers, or if these suppliers are unable toprovide equipment that meets the specifications of our 

 

 

 

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customers on the deliveryschedules required by our customers, and at acceptable prices, our businesswould be substantially harmed.

 

Our Spectrum Overlaysolutions are implemented over the HFC plant and, as such, they interface andintegrate with existing products from multiple other vendors. Future offeringsby these vendors may not be sufficiently compatible with our Spectrum Overlaysolutions. In addition, we depend on the continuous delivery of components byvarious manufacturers of electronic connectors, filters, boards andtransistors.

 

Furthermore, we haveproduced certain of our products only in limited quantities. If demand forthese products increases significantly, we will need to implement and addressadditional processes, procedures and activities necessary to support increasedproduction. If we are unable to do so, our business would be substantiallyharmed.

 

**Weobtain some of the components included in our solutions from a single source ora limited group of suppliers, and the loss of any of these suppliers couldcause production delays and a substantial loss of revenue.**

 

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

 

·                                    delays in delivery or shortages incomponents could interrupt and delay manufacturing and result in cancellationof orders for our systems;

 

·                                      suppliers could increase component pricessignificantly and with immediate effect;

 

·                                    we may not be able to develop alternativesources for system components, if or as required in the future;

 

·                                    suppliers could discontinue themanufacture or supply of components used in our systems. In such event, wemight 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 isimmediately required to compensate for potential component shortages ordiscontinuation.

 

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

 

**If we donot effectively manage our costs, our business could be substantially harmed.**

 

We have increased certainexpenses to address new business opportunities in the Cable Solutions segment,and we will need to continue to monitor closely our costs and expenses. If themarket for our cable solutions does not expand or takes longer to develop thanwe expect, we may need to further reduce our operations. In addition, ouracquisition of Xtend has caused our costs to increase as we seek to developbusiness.

 

**Delaysand shortages in the supply of components from our suppliers and third partyvendors could reduce our revenues or increase our cost of revenues.**

 

Delays and shortages inthe supply of components are typical in our industry. We have experienced minordelays and shortages on more than one occasion. In addition, if worldwidemanufacturing capacity does not rise along with a rise in demand, oursubcontract manufacturers could allocate available capacity to larger customersor to customers that have long-term supply contracts in place.

 

Our inability to obtainadequate manufacturing capacity at acceptable prices, or any delay orinterruption in supply, could reduce our revenues or increase our cost ofrevenue and could seriously harm our business.

 

 

 

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**Thirdparties may bring infringement claims against us that could harm our ability tosell our products and result in substantial liabilities.**

 

Thirdparties could assert, and it could be found, that our technologies infringetheir proprietary rights. We could incur substantial costs to defend anylitigation, and intellectual property litigation could force us to do one ormore of the following:

 

·              obtain licenses to the infringingtechnology;

 

·              pay substantial damages under applicablelaw;

 

·              cease the manufacture, use and sale ofinfringing products; or

 

·              expend significant resources to developnon-infringing technology.

 

Anyinfringement claim or litigation against us could significantly harm ourbusiness, operating results and financial condition.

 

**Ifwe do not adequately protect our intellectual property, we may not be able tocompete and our ability to provide unique products may be compromised.**

 

Oursuccess depends in part on our ability to protect our proprietary technologies.We rely on a combination of patent, copyright and trademark laws, trade secretsand confidentiality and other contractual provisions to establish and protectour proprietary rights. Our pending or future patent applications may not beapproved and the claims covered by such applications may be reduced. Ifallowed, our patents may not be of sufficient scope or strength, and others mayindependently develop similar technologies or products. Litigation, which couldresult in substantial costs and diversion of our efforts, may also be necessaryto enforce any patents issued or licensed to us or to determine the scope andvalidity of third party proprietary rights. Any such litigation, regardless ofthe outcome, could be expensive and time consuming, and adverse determinationsin any such litigation could seriously harm our business.

 

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

 

Weregularly evaluate and seek to explore and develop derivative products relatingto our Cable Solutions segment. We may not be able to secure all desiredintellectual property protection relating to such derivative products.Furthermore, because of the rapid pace of change in the broadband industry,much of our business and many of our products rely on technologies that evolveconstantly and this continuing uncertainty makes it difficult to forecastfuture demand for our products.

 

**Governmentregulation and industry standards may increase our costs of doing business,limit our potential markets or require changes to our business model andadversely affect our business.**

 

The emergence or evolution of regulations and industrystandards for broadband products, through official standards committees orwidespread use by operators, could require us to modify our systems, which maybe expensive and time-consuming, and to incur substantial compliance costs.Radio frequencies are subject to extensive regulation under the laws of theUnited States, foreign laws and international treaties. Each country hasdifferent regulations and regulatory processes for wireless communicationsequipment and uses of radio frequencies. Failure by the regulatory authoritiesto allocate suitable, sufficient radio frequencies to potential customers in atimely manner could result in the delay or loss of potential orders for oursystems and seriously harm our business.

 

Someof our products and technology are subject to export control laws andregulations. We are subject to the risk that more stringent export controlrequirements could be imposed in the future on product classes that includeproducts exported by us, which would result in additional compliance burdensand could impair the enforceability of our contract rights. We may not be ableto renew our export licenses as necessary from time to time. In addition, wemay be required to apply for additional licenses to cover modifications andenhancements to our products. Any revocation or expiration of any 

 

 

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requisite license, thefailure to obtain a license for product modifications and enhancements, or morestringent export control requirements could seriously harm our business.

 

**Weare incurring additional costs and devoting more management resources to complywith increasing regulation of corporate governance and disclosure.**

 

TheSarbanes Oxley Act of 2002 and the resulting rules of the Nasdaq StockMarket will continue to require changes in our corporate governance, publicdisclosure and compliance practices. The scope of rules and regulationsapplicable to us has increased and will continue to increase our legal andfinancial compliance costs.

 

As apublic company, our systems of internal controls over financial reporting arerequired to comply with the standards adopted by the Securities and ExchangeCommission (“SEC”) and the Public Company Accounting Oversight Board (the “PCAOB”).We will be required to make our first annual certification on our internalcontrols over financial reporting in our annual report for the fiscal yearended December 30, 2007. In preparing for such certification, we areevaluating our internal controls for compliance with applicable SEC and PCAOBrequirements, and we may be required to design enhanced processes and controlsto address issues identified through this review. This could result insignificant delays and cost to us and require us to divert substantialresources, including management time, from other activities. We have commenceda review of our existing internal control structure and may need to hireadditional personnel. Although our review is not complete, we are taking stepsto improve our internal control structure by dedicating internal resources toanalyze and improve our internal controls, to be supplemented periodically withoutside consultants as needed. However, if we fail to achieve and maintain theadequacy of our internal controls, we may not be able to conclude that we haveeffective internal controls over financial reporting as of the end of ourfiscal year 2007. Moreover, although our management will continue to review andevaluate the effectiveness of our internal controls, we can give no assurancethat there will be no material weaknesses in our internal control overfinancial reporting. We may in the future have material weaknesses or othercontrol deficiencies in our internal control over financial reporting as aresult of our controls becoming inadequate due to changes in conditions, thedegree of compliance with our internal control policies and proceduresdeteriorating, or for other reasons. If we have significant deficiencies ormaterial weaknesses or other control deficiencies in our internal control overfinancial reporting, our ability to record, process, summarize and reportfinancial information within the time periods specified in the rules andforms of the SEC will be adversely affected. This failure could materially andadversely impact our business, our financial condition and the market value ofour securities.

 

Theselaws and regulations and perceived increased risk of liability could make itmore difficult for us to attract and retain qualified members of our board ofdirectors, particularly to serve on our audit committee, and qualifiedexecutive officers. We cannot estimate the timing or magnitude of additionalcosts we may incur as a result.

 

**Oursuccess depends significantly on Davidi Gilo, our Chairman of the Board, theloss of whom could seriously harm our business.**

 

Ourfuture success depends in large part on the continued services of our seniormanagement and key personnel. In particular, we significantly depend on theservices of Davidi Gilo, our Chairman of the Board and former Chief ExecutiveOfficer. We do not carry key person life insurance on our senior management orkey personnel. Any loss of the services of Mr. Gilo or other members ofsenior management or other key personnel could seriously harm our business.

 

**Recentregulations related to equity compensation could adversely affect earnings,affect our ability to raise capital and affect our ability to attract andretain key personnel.**

 

Sinceour inception, we have used stock options as a fundamental component of ouremployee compensation packages. We believe that our stock option plans are animportant tool to link the long-term interests of stockholders and employees,especially executive management, and serve to motivate management to makedecisions that will, in the long run, give the best returns to stockholders.FASB has adopted changes to generally accepted accounting principals in theUnited States that require us to record a charge to earnings for employee stockoption grants, as well as other equity based awards. The change has negativelyimpacted our earnings and, if such impact is material in the future, couldaffect our ability to raise capital on acceptable terms. In addition,regulations implemented by the Nasdaq Stock Market requiring stockholderapproval for all stock option plans could make it more difficult for us to grantstock options to employees in the future. To the extent these new regulationsmake it more difficult or unacceptably expensive to grant stock options toemployees, we may incur increased compensation costs, change our equitycompensation strategy or find it difficult to attract, retain and motivateemployees, each of which could materially and adversely affect our business.

 

 

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**Thegovernment programs and benefits we receive require us to satisfy prescribedconditions. These programs and benefits may be terminated or reduced in thefuture, which would increase our costs and taxes and could seriously harm ourbusiness.**

 

Certainof our capital investments have been granted “approved enterprise” status underIsraeli law providing us with certain Israeli tax benefits. The benefitsavailable to an approved enterprise are conditioned upon the fulfillment ofconditions stipulated in applicable law and in the specific certificate ofapproval. If we fail to comply with these conditions, in whole or in part, wemay be required to pay additional taxes for the period in which we enjoyed thetax benefits and would likely be denied these benefits in the future. From timeto time, the government of Israel has considered reducing or eliminating thebenefits available under the approved enterprise program. These tax benefitsmay not be continued in the future at their current levels or at all. Thetermination or reduction of these benefits would increase our taxes and could seriouslyharm our business. As of the date hereof, our Israeli subsidiaries haveaccumulated loss carry forwards for Israeli tax purposes and therefore have notenjoyed any tax benefits under current approved enterprise programs.

 

In thepast, we have received grants from the government of Israel for the financingof a portion of our research and development expenditures for previous productsin Israel. The regulations under which we received these grants restrict ourability to manufacture products or transfer technology outside of Israel forproducts developed with this technology. Furthermore, these grants may not beavailable to us in the future.

 

As of April 1,2005, the government of Israel eliminated the ability of companies to submitnew applications for approved enterprise status. This change in the governmentpolicy may hinder us in the future with respect to any benefits we may havereceived for new undertakings which would have been entitled to “approvedenterprise” status.

 

**Wemay lose our United States income tax net operating loss carryforwards if weexperience a significant change in ownership.**

 

Theutilization of net operating loss carryforwards may be subject to substantialannual limitations if there has been a significant “change in ownership.” Any “changein ownership,” as described in Section 382 of the Internal Revenue Code,may substantially limit our ability to utilize the net operating lossescarryforwards. As of December 31, 2006, we had United States federal netoperating loss carryforwards of approximately $55,100,000, which will expire inyears 2011 through 2026 and state net operating losses of approximately$40,200,000 which will expire in years 2008 through 2016.

 

**Amajority of our directors and certain officers have relationships with DavidiGilo and his affiliated companies that could be deemed to limit theirindependence.**

 

Amajority of our board of directors, Lewis Broad, Neill Brownstein, AvrahamFischer, Samuel Kaplan and Alan Zimmerman and certain of our officers, have hadprofessional relationships with Davidi Gilo, our Chairman of the Board andformer Chief Executive Officer, and his affiliated companies for several years.These members of our board of directors previously served on the boards ofdirectors of DSP Communications, Inc. and/or DSP Group, Inc., ofwhich Mr. Gilo was formerly the controlling stockholder and the Chairmanof the Board. In addition, Avraham Fischer is a senior partner of the law firmof Fischer, Behar, Chen & Co., which represents us on matters relatingto Israeli law, is an investor and co-chief executive officer of an Israeliinvestor group in which Mr. Gilo was an investor until October 2005,and is co-chief executive officer and a director of Clal Industries andInvestments, Ltd., which has made a significant investment in ANI, arelated party of our company. However, the long-term relationships betweenthese directors and officers and Mr. Gilo and his affiliated companiescould be considered to limit their independence.

 

**Becauseour management has the ability to control stockholder votes, the premium overmarket price that an acquirer might otherwise pay could be reduced and anymerger or takeover could be delayed.**

 

As of March 31,2007, our management collectively owned approximately 33.49% of our outstandingcommon stock (based on the number of shares owned by these individuals and thenumber of shares issuable upon exercise of options within 60 days of March 31,2007).

 

As aresult, these stockholders, acting together, will be able to control theoutcome of all matters submitted for stockholder action, including:

 

·              electing members to our board ofdirectors;

 

 

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·                                           approving significant change-in-controltransactions;

 

·                                           determining the amount and timing ofdividends paid to themselves and to our public stockholders; and

 

·                                           controlling our management andoperations.

 

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

 

**Werely on a continuous power supply to conduct our operations, and any electricalor natural resource crisis could disrupt our operations and increase ourexpenses.**

 

Werely on a continuous power supply for manufacturing and to conduct our businessoperations. Interruptions in electrical power supplies occur around the worldfrom time to time. Meanwhile, prices of the resources, such as electrical powerand crude oil, upon which we ultimately rely, directly or indirectly, inrunning our business have been volatile. Power shortages could disrupt ourmanufacturing, information technology and business operations and those of manyof our suppliers, and could cause us to fail to meet production schedules andcommitments to customers and other third parties. Any disruption to ouroperations or those of our suppliers could result in damage to our current andprospective business relationships and could result in lost revenue andadditional expenses, thereby harming our business and operating results.

 

**Becausethe Nasdaq Global Market is likely to continue to experience extreme price andvolume fluctuations, the price of our stock may decline.**

 

Themarket price of our shares has been and likely will continue to be highlyvolatile and could be subject to wide fluctuations in response to numerousfactors, including the following:

 

·              actual or anticipated variations in ourquarterly operating results or those of our competitors;

 

·              announcements by us or our competitors ofnew products or technological innovations;

 

·              introduction and adoption of new industrystandards;

 

·              changes in financial estimates orrecommendations by securities analysts;

 

·              changes in the market valuations of ourcompetitors;

 

·              announcements by us or our competitors ofsignificant acquisitions or partnerships; and

 

·              sales of our common stock.

 

Manyof these factors are beyond our control and may negatively impact the marketprice of our common stock, regardless of our performance. In addition, thestock market in general, and the market for technology and telecommunicationsrelated companies in particular, have been highly volatile. Our common stockmay not trade at the same levels compared to shares of other technologycompanies and shares of technology companies, in general, may not sustain theircurrent market prices.

 

Todate, the trading volume in our common stock generally has been relatively lowand significant price fluctuations can occur as a result. If the generally lowtrading volumes experienced to date continue, such price fluctuations couldcontinue in the future and the sale prices of our common stock could declinesignificantly. Investors may therefore have difficulty selling their shares.

 

In thepast, securities class action litigation has often been brought against acompany following periods of volatility in the market price of its securities.We could become the target of similar litigation in the future. Securitieslitigation could 

 

 

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result in substantialcosts and divert management’s attention and resources, which could seriouslyharm our business and operating results.

 

**Ifsecurities or industry analysts do not publish research or reports about ourbusiness, if they change their recommendations regarding our shares adverselyor if our operating results to not meet their expectations, the price of ourcommon stock could decline.**

 

Thetrading market for our common stock will be influenced by the research andreports that industry and securities analysts publish about us or our business.If these analysts fail to publish reports about us or if one or more of theseanalysts cease coverage of our company or fail to publish reports on usregularly, we could lose visibility in the financial markets, which in turncould cause the price of our common stock to decline. Moreover, if one or moreanalysts who cover us downgrade our common stock or if our operating results donot meet their expectations, the price of our common stock could decline.

 

**Provisionsof our governing documents and Delaware law could discourage acquisitionproposals or delay a change in control.**

 

OurFifth Amended and Restated Certificate of Incorporation and Amended andRestated Bylaws contain anti-takeover provisions that could make it moredifficult for a third party to acquire control of us, even if that change incontrol would be beneficial to stockholders. Specifically:

 

·                                          our board of directors has the authority to issuecommon stock and preferred stock and to determine the price, rights andpreferences 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 toamend key provisions of our Fifth Amended and Restated Certificate ofIncorporation and Amended and Restated Bylaws;

 

·                                            there are limitations on who can callspecial meetings of stockholders;

 

·                                          stockholders are not able to take action by writtenconsent; and

 

·                                           advance notice is required fornominations of directors and for stockholder proposals.

 

Inaddition, provisions of Delaware law and our stock option plans may alsodiscourage, delay or prevent a change of control or unsolicited acquisitionproposals.

 

**Itmay be difficult to enforce a judgment in the United States against us, ournonresident Chief Financial Officer and certain directors.**

 

OurChief Financial Officer and two of our directors are not residents of theUnited States, and a substantial portion of our assets and the assets of thesepersons are located outside the United States. Therefore, it may be difficultto enforce a judgment obtained in the United States based upon the civil orcriminal liabilities provisions of the United States federal securities lawsagainst us or any of those persons or to effect service of process upon thesepersons in the United States.

 

**Item 2.****           ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

On March 28,2007, we delivered the 2007 Convertible Note to Goldman, Sachs & Co.For a description of the 2007 Financing, including a description of ourexpenses paid in connection with the 2007 Financing, see note 7 above. Werelied upon Rule 506 of Regulation D and Section 4(2) of theSecurities Act of 1933, as amended, for the exemption from registration of thesale of such securities.

 

 

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**Item 6.****           ****Exhibits**

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                         | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                           | ** ** |
| 3.1                 |       | Fifth Amended and  Restated Certificate of Incorporation. Previously filed as an exhibit to our  Quarterly Report on Form 10-Q for the period ended March 31, 2007,  and incorporated herein by reference. |       |
|                |       |                                                                                                                                                                                                                 |       |
| 3.2                 |       | Amended and Restated  Bylaws. Previously filed as an exhibit to our Quarterly Report on  Form 10-Q for the period ended March 31, 2007, and incorporated  herein by reference.                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 4.1                 |       | Reference is made to  Exhibits 3.1 and 3.2 above.                                                                                                                                                                    |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.1                |       | Certificate of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.2                |       | Certificate of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 32.1                |       | Certificate of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                            |       |

 

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date: December 19, 2007 |
|------------------------------|
|                         |
|                         |
| **VYYO INC.**                |
|                         |
|                         |
| By:                          | /s/ Wayne H. Davis |   |
|                         | Wayne H. Davis, Chief Executive Officer |
|                         | (Duly Authorized Officer) |
|                         |
|                         |
| By:                          | /s/ Robert K. Mills |   |
|                         | Robert K. Mills, Chief Financial Officer |
|                         | (Duly Authorized Officer and Principal Financial  Officer) |
|                              |  |  |  |  |

 

 

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** **

**EXHIBITINDEX**

** **
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                          | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                |       |                                                                                                                                                                                                                 |       |
| 3.1                 |       | Fifth Amended and  Restated Certificate of Incorporation. Previously filed as an exhibit to our  Quarterly Report on Form 10-Q for the period ended March 31, 2007,  and incorporated herein by reference. |       |
|                |       |                                                                                                                                                                                                                 |       |
| 3.2                 |       | Amended and Restated  Bylaws. Previously filed as an exhibit to our Quarterly Report on  Form 10-Q for the period ended March 31, 2007, and incorporated  herein by reference.                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 4.1                 |       | Reference is made to  Exhibits 3.1 and 3.2 above.                                                                                                                                                                    |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.1                |       | Certificate of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.2                |       | Certificate of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 32.1                |       | Certificate of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adapted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                            |       |

 

 

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