##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the Quarterly Period Ended June 30, 2005



or



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



For the transition period from  to



Commission File Number 000-30189



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VYYO INC.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                      |  | 94-3241270                            
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification Number)
|                                                              | 
|4015 Miranda Avenue, First Floor, Palo Alto, California       |  | 94304                                 
|(Address of Principal Executive Offices)                      |  | (Zip Code)                            



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



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



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



As of August 9, 2005, there
were 15,608,601 shares of Common Stock outstanding.



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##### Table of Contents

INDEX



VYYO INC.



|                                                                                                           |  |         
|---------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                           |  | Page No.
|PART I. FINANCIAL INFORMATION                                                                              |  |         
|                                                                                                           | 
|Item 1. Condensed Consolidated Financial Statements (Unaudited)                                            |  |         
|                                                                                                           | 
|Condensed Consolidated Balance Sheets-June 30, 2005 and December 31, 2004                                  |  | 1       
|                                                                                                           | 
|Condensed Consolidated Statements of Operations-three and six months ended June 30, 2005 and June 30, 2004 |  | 2       
|                                                                                                           | 
|Condensed Consolidated Statements of Cash Flows-six months ended June 30, 2005 and June 30, 2004           |  | 3       
|                                                                                                           | 
|Notes to Condensed Consolidated Financial Statements                                                       |  | 4       
|                                                                                                           | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 17      
|                                                                                                           | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                         |  | 38      
|                                                                                                           | 
|Item 4. Controls and Procedures                                                                            |  | 39      
|                                                                                                           | 
|PART II. OTHER INFORMATION                                                                                 |  |         
|                                                                                                           | 
|Item 1. Legal Proceedings                                                                                  |  | 39      
|                                                                                                           | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 39      
|                                                                                                           | 
|Item 3. Defaults Upon Senior Securities                                                                    |  | 39      
|                                                                                                           | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                |  | 40      
|                                                                                                           | 
|Item 5. Other Information                                                                                  |  | 40      
|                                                                                                           | 
|Item 6. Exhibits                                                                                           |  | 40      
|                                                                                                           | 
|SIGNATURES                                                                                                 |  | 41      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1.
Condensed Consolidated Financial Statements



Vyyo Inc.

Condensed Consolidated Balance Sheets

(In Thousands)



|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                |  | June 30,2005 |          |   | December 31,2004 |  
|                                                                                                                                                                                                |  | (Unaudited)  |          |   |                  |  
|ASSETS                                                                                                                                                                                          |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                                |  |             
|CURRENT ASSETS:                                                                                                                                                                                 |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                       |  | $            | 4,059    |   |                  | $ | 5,512    |  
|Short-term investments                                                                                                                                                                          |  |              | 23,250   |   |                  |   | 36,700   |  
|Accounts receivable, net                                                                                                                                                                        |  |              | 1,321    |   |                  |   | 1,037    |  
|Inventories (note 2)                                                                                                                                                                            |  |              | 2,899    |   |                  |   | 3,299    |  
|Other                                                                                                                                                                                           |  |              | 1,130    |   |                  |   | 777      |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                            |  |              | 32,659   |   |                  |   | 47,325   |  
|                                                                                                                                                                                                |  |             
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                     |  |              | 1,758    |   |                  |   | 1,252    |  
|EMPLOYEE RIGHTS UPON RETIREMENT FUNDED                                                                                                                                                          |  |              | 794      |   |                  |   | 792      |  
|INTANGIBLE ASSETS (note 3)                                                                                                                                                                      |  |              | 5,784    |   |                  |   | 6,802    |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                    |  | $            | 40,995   |   |                  | $ | 56,171   |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                            |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                                |  |             
|CURRENT LIABILITIES:                                                                                                                                                                            |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                |  | $            | 1,949    |   |                  | $ | 1,934    |  
|Accrued liabilities (note 5)                                                                                                                                                                    |  |              | 6,813    |   |                  |   | 7,545    |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                       |  |              | 8,762    |   |                  |   | 9,479    |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT                                                                                                                                                   |  |              | 1,552    |   |                  |   | 1,453    |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|CONTINGENCY (note 7)                                                                                                                                                                            |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                                |  |             
|STOCKHOLDERS EQUITY:                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|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; 15,604,101 and 15,232,420 shares issued and
outstanding at June 30, 2005 and December 31, 2004, respectively |  |              | 242,968  |   |                  |   | 242,956  |  
|Notes receivable from stockholders                                                                                                                                                              |  |              | (850     | ) |                  |   | (1,037   | )
|Accumulated other comprehensive loss                                                                                                                                                            |  |              | (16      | ) |                  |   | (222     | )
|Accumulated deficit                                                                                                                                                                             |  |              | (211,421 | ) |                  |   | (196,458 | )
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                      |  |              | 30,681   |   |                  |   | 45,239   |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                      |  | $            | 40,995   |   |                  | $ | 56,171   |  
|                                                                                                                                                                                                |  |              |          |   |                  |   |          |  



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



1



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##### Table of Contents

Vyyo Inc.

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Common Share Data)

(Unaudited)



|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                            |  | Three Months endedJune 30, |        |   | Six Months endedJune 30, |  
|                                                            |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|REVENUES (note 10)                                          |  | $                          | 1,152  |   |                          | $ | 2,386  |      |  | $ | 1,856   |   |  | $ | 4,611  |  
|COST OF REVENUES:                                           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Cost of products sold                                       |  |                            | 1,347  |   |                          |   | 1,225  |      |  |   | 2,041   |   |  |   | 2,222  |  
|Amortization of technology (note 3)                         |  |                            | 92     |   |                          |   |       |      |  |   | 184     |   |  |   |       |  
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|TOTAL COST OF REVENUES                                      |  |                            | 1,439  |   |                          |   | 1,225  |      |  |   | 2,225   |   |  |   | 2,222  |  
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|GROSS PROFIT (LOSS)                                         |  |                            | (287   | ) |                          |   | 1,161  |      |  |   | (369    | ) |  |   | 2,389  |  
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|OPERATING EXPENSES (INCOME):                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Research and development                                    |  |                            | 2,858  |   |                          |   | 1,268  |      |  |   | 5,590   |   |  |   | 2,483  |  
|Acquisition of research and development in process (note 3) |  |                            |       |   |                          |   | 1,402  |      |  |   |        |   |  |   | 1,402  |  
|Selling and marketing                                       |  |                            | 3,104  |   |                          |   | 1,169  |      |  |   | 5,791   |   |  |   | 2,576  |  
|General and administrative, net                             |  |                            | 1,872  |   |                          |   | 1,324  |      |  |   | 3,348   |   |  |   | 2,745  |  
|Amortization of intangible assets (note 3)                  |  |                            | 417    |   |                          |   |       |      |  |   | 834     |   |  |   |       |  
|Restructuring adjustments (note 8)                          |  |                            | (93    | ) |                          |   | (48    | )    |  |   | (408    | ) |  |   | (549   | )
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                    |  |                            | 8,158  |   |                          |   | 5,115  |      |  |   | 15,155  |   |  |   | 8,657  |  
|                                                            |  |                            |        |  
|OPERATING LOSS                                              |  |                            | (8,445 | ) |                          |   | (3,954 | )    |  |   | (15,524 | ) |  |   | (6,268 | )
|                                                            |  |                            |        |  
|INTEREST INCOME, net                                        |  |                            | 120    |   |                          |   | 104    |      |  |   | 196     |   |  |   | 357    |  
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|LOSS FROM CONTINUING OPERATIONS                             |  |                            | (8,325 | ) |                          |   | (3,850 | )    |  |   | (15,328 | ) |  |   | (5,911 | )
|                                                            |  |                            |        |  
|DISCONTINUED OPERATIONS (note 4)                            |  |                            | 100    |   |                          |   | 34     |      |  |   | 365     |   |  |   | (50    | )
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|LOSS FOR THE PERIOD                                         |  | $                          | (8,225 | ) |                          | $ | (3,816 | )    |  | $ | (14,963 | ) |  | $ | (5,961 | )
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|LOSS PER COMMON SHARE                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted:                                          |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Continuing operations                                       |  | $                          | (0.54  | ) |                          | $ | (0.29  | )    |  | $ | (1.00   | ) |  | $ | (0.45  | )
|Discontinued operations                                     |  |                            | 0.01   |   |                          |   |       |      |  |   | 0.02    |   |  |   |       |  
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                                            |  | $                          | (0.53  | ) |                          | $ | (0.29  | )    |  | $ | (0.98   | ) |  | $ | (0.45  | )
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted                                           |  |                            | 15,381 |   |                          |   | 13,188 |      |  |   | 15,288  |   |  |   | 13,120 |  
|                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  



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



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##### Table of Contents

Vyyo Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



|                                                                        |  |                           |         |   |      |   |         |  
|----------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                        |  | Six Months ended June 30, |        
|                                                                        |  | 2005                      |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |  |                           |         |   |      |   |         |  
|Loss for the period                                                     |  | $                         | (14,963 | ) |      | $ | (5,961  | )
|Adjustments to reconcile loss to net cash used in operating activities: |  |                           |         |   |      |   |         |  
|Income and expenses not involving cash flows:                           |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                           |  |                           | 1,516   |   |      |   | 274     |  
|Acquisition of research and development in process                      |  |                           |        |   |      |   | 1,402   |  
|Amortization and charge related to stock-based compensation, net        |  |                           | (300    | ) |      |   | (485    | )
|Capital gain on sale of fixed assets                                    |  |                           | (2      | ) |      |   | (44     | )
|Changes in assets and liabilities:                                      |  |                           |         |   |      |   |         |  
|Accounts receivable                                                     |  |                           | (284    | ) |      |   | (533    | )
|Other current assets                                                    |  |                           | (353    | ) |      |   | 94      |  
|Inventories                                                             |  |                           | 400     |   |      |   | (760    | )
|Accounts payable                                                        |  |                           | 15      |   |      |   | 437     |  
|Accrued liabilities                                                     |  |                           | (732    | ) |      |   | 84      |  
|Liability for employee rights upon retirement                           |  |                           | 99      |   |      |   | 63      |  
|                                                                        |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                   |  |                           | (14,604 | ) |      |   | (5,429  | )
|                                                                        |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |  |                           |         |   |      |   |         |  
|Purchase of property and equipment                                      |  |                           | (1,004  | ) |      |   | (357    | )
|Proceeds from sale of property and equipment                            |  |                           | 2       |   |      |   | 44      |  
|Purchase of short-term investments                                      |  |                           | (9,230  | ) |      |   | (59,105 | )
|Proceeds from sales and maturities of short-term investments            |  |                           | 22,886  |   |      |   | 67,572  |  
|Contributions to severance pay funds                                    |  |                           | (2      | ) |      |   | (58     | )
|Net cash acquired from acquisition of Xtend                             |  |                           |        |   |      |   | 1,608   |  
|                                                                        |  |                           |         |   |      |   |         |  
|Net cash provided by investing activities                               |  |                           | 12,652  |   |      |   | 9,704   |  
|                                                                        |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                   |  |                           |         |   |      |   |         |  
|Proceeds from exercise of stock options                                 |  |                           | 312     |   |      |   | 641     |  
|Proceeds from notes receivable from stockholders                        |  |                           | 187     |   |      |   |        |  
|                                                                        |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                               |  |                           | 499     |   |      |   | 641     |  
|                                                                        |  |                           |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                        |  |                           | (1,453  | ) |      |   | 4,916   |  
|Cash and cash equivalents at beginning of period                        |  |                           | 5,512   |   |      |   | 12,930  |  
|                                                                        |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                              |  | $                         | 4,059   |   |      | $ | 17,846  |  
|                                                                        |  |                           |         |   |      |   |         |  



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



3



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



1. General Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of Vyyo Inc. have been prepared in accordance with
generally accepted accounting principles in the United States (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the interim period are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2004,
included in the Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission (the SEC).



Liquidity, Capital Resources and Going Concern Considerations



The consolidated financial statements of Vyyo Inc., and its wholly-owned subsidiaries (collectively, the Company) are presented on a going
concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced a significant loss from operations. For the six-month period ended June 30, 2005, the Company
incurred a net loss of $15.0 million and had an accumulated deficit of $211.4 million. The Companys ability to continue as a going concern will depend upon its ability to raise additional capital or attain profitable operations. The Company is
considering raising additional capital to fund its operations. In addition, the Company is seeking to expand its revenue base by adding new customers and further reducing expenses. Failure to secure additional capital or to expand its revenue base
would likely result in the Company depleting its available funds and not being able to pay its obligations when they become due. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.



Organization and Principles of Consolidation



The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. Following the Companys June 30, 2004 acquisition of all of the outstanding shares of Xtend Networks Ltd., an Israeli privately-held development stage company (Xtend), the results of Xtends
operations were consolidated with the Companys operations commencing July 1, 2004. All material inter-company balances and transactions have been eliminated in consolidation.



The Company provides cable and wireless broadband access solutions through two business segments: the Wireless
Network segment and the Cable segment. The Companys products are designed for use by utilities, cable television and telecommunication operators, wireless ISPs and enterprise. The Wireless Network segment enables utilities to
operate secure wireless networks for communications and SCADA (Supervisory Control And Data Acquisition) of their remote assets. Cable television and telecommunication operators, wireless ISPs and enterprise use the Data Over Cable System Interface
Specification (DOCSIS®)-based solutions of the
Cable segment to deliver telephony (T1/E1), high-speed data and voice over Internet protocol (VOIP) to business and residential subscribers. The Companys cable bandwidth expansion solutions are designed to expand cable
operators typical HFC (hybrid-fiber coax) network capacity in the last mile by up to two times in the downstream and up to ten times in the upstream, addressing bandwidth demand for T1 and other advanced services.



The Companys Cable segment represents the results of operations of
Xtend and its wholly-owned, U.S.-based subsidiary, Xtend Networks Inc., which were consolidated with the Companys operations commencing July 1, 2004, and provides infrastructure solutions that expand the bandwidth of cable television lines.



On August 12, 2003, the Companys board of directors
determined to cease the software business operated by Shira Computers Ltd. (Shira), the Companys wholly-owned subsidiary, and terminate all of Shiras employees. Prior to the cessation of operations, Shira operated in the
Software Products segment. The cessation of Shiras operations represents a disposal of a business segment under Statement of Financial Accounting Standards (SFAS) No. 144 (Accounting for the Impairment or Disposal
of Long-Lived Assets). Accordingly, the Company has classified the results of the software segment as discontinued operations, and reclassified prior periods respectively. On March 31, 2005, the Company sold all of its shares of Shira to third
parties.



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Summary of Significant Accounting Principles



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



Use of Estimates



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



Short-Term Investments



Pursuant to SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, the Companys investments in debt securities have been designated as available-for-sale. Available-for-sale securities are carried at fair value, which is determined based upon the quoted market prices of the
securities, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a component of stockholders equity until realized. Realized gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income, net. The Company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the Company has classified all investments as short-term under
short-term investments, even though the stated maturity date may be one year or more beyond the current balance sheet date. Interest, amortization of premiums, accretion of discounts and dividends on securities classified as
available-for-sale are included in interest income, net.



In
March 2004, the Financial Accounting Standards Board (FASB) issued Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments which
provides guidance for assessing impairment losses on debt and equity investments. EITF Issue No. 03-1 includes annual disclosure requirements for investments that are deemed temporarily impaired. In September 2004, FASB delayed the accounting
provisions of EITF Issue No. 03-1 (however, the disclosure requirements remain effective). The Company will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released. The Company recognizes an impairment charge when the
decline in the fair values of these investments below their cost basis are deemed to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time and the extent
to which the fair value has been below the cost basis, the current financial condition of the investee and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market
value. The Company has recorded expenses of $23,000 and $135,000, respectively, for the three and six months ended June 30, 2005 for an other-than-temporary impairment in its available-for-sale securities.



Inventory



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



During the three months ended June 30, 2005, the Company
recorded a write-down of inventory of $0.35 million. The Company took this write-down to account for excess inventory resulting from the Companys increased focus on providing products to utility and cable customers.



During the year ended December 31, 2001, the Company wrote down excess
inventory and purchase commitments of $8.45 million. The Company charged the write-down to the cost of revenues. There were no revenues in the three and six months ended June 30, 2005 from inventory previously written-down to $0. In the three and
six months ended June 30, 2004, inventory that was previously written down to $0 by taking a charge of $0.1 million and $0.4 million was sold for $0.4 million and $1.0 million, respectively.



5



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Intangible Assets



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



Impairment of Long-Lived Assets



SFAS No. 144 (Accounting for the Impairment or Disposal of Long-Lived Assets) (SFAS No. 144) requires that long-lived assets
including certain intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS No. 144, if the sum of the
expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount, an impairment loss would be recognized, and the assets would be written down to their estimated fair values.



Foreign Currency Transactions



The U.S. dollar is the functional currency for the Company and all of its
foreign subsidiaries. All of the sales of the Company are made in U.S. dollars. In addition, a substantial portion of the foreign subsidiaries costs are incurred in U.S. dollars. Since the U.S. dollar is the primary currency in the economic
environment in which the foreign subsidiaries operate, monetary accounts maintained in currencies other than the U.S. dollar (principally cash and liabilities) are remeasured using the representative foreign exchange rate at the balance sheet date.
Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction.



The effects of foreign currency remeasurement are reported in current operations and have not been material to date.



Revenue Recognition



Revenues from the Wireless Network and Cable segments are derived from sales of products. As of June 30, 2005, the
Companys revenues from services were not significant. The Companys products are off-the-shelf products, sold as is, without further adjustment or installation. These products are usually sold individually according to a
standard fixed price determined by the Company. When establishing a relationship with a new customer, the Company may also sell these products together as a package, in which case these products are shipped at the same time to the
customer. As the Companys products are off-the-shelf products, the Company does not recognize revenue when its customers have the right of return or any additional services are not delivered (except for standard product warranty).



Revenues from the Companys products are recorded when (a) persuasive
evidence of an arrangement exists; (b) delivery has occurred and customer acceptance requirements have been met, if any, and the Company has no additional obligations; (c) the price is fixed or determinable; and (d) collection of payment is
reasonably assured.



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



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



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



Loss per Share



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



6



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Employee Stock-Based Compensation



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



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



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



Pro forma information regarding net loss and loss per share, required under
SFAS No. 123, has been determined as if the Company had accounted for its stock options and shares of restricted stock under the fair value method of SFAS No. 123. The fair value for stock options and shares of restricted stock was estimated at the
date of each grant using the Black-Scholes option pricing model with the following assumptions for the three and six months ended June 30, 2005 and 2004 as follows:



|                               |  |                            |  |                          |  |      |  |     
|------------------------------ |  | -------------------------- |  | ------------------------ |  | ---- |  | ----
|                               |  | Three Months endedJune 30, |  | Six Months endedJune 30,
|                               |  | 2005                       |  | 2004                     |  | 2005 |  | 2004
|Risk-free interest rates       |  | 3.45                       |  | 2.09                     |  | 3.45 |  | 1.09
|Weighted-average expected life |  | 2.50                       |  | 3.14                     |  | 2.50 |  | 3.14
|Volatility                     |  | 0.74                       |  | 0.65                     |  | 0.58 |  | 0.85
|Dividend Yields                |  |                           |  |                         |  |     |  |    



7



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Employee Stock-Based Compensation (continued)



The Companys pro forma information is as follows:



|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                   |  | Three Months endedJune 30,          |        |   | Six Months endedJune 30,            |  
|                                                                                                   |  | 2005                                |        |   | 2004                                |   |        | 2005 |  |   | 2004    |  
|                                                                                                   |  | In thousands(except per share data) |        |   | In thousands(except per share data) |  
|Loss from continuing operations as reported                                                        |  | $                                   | (8,325 | ) |                                     | $ | (3,850 | )    |  | $ | (15,328 | ) |  | $ | (5,911 | )
|Add (deduct): stock-based employee compensation income included in reported loss                   |  |                                     | (39    | ) |                                     |   | 62     |      |  |   | (300    | ) |  |   | (485   | )
|Add: stock-based employee compensation expenses determined under fair value method for all awards  |  |                                     | (1,635 | ) |                                     |   | (925   | )    |  |   | (2,999  | ) |  |   | (1,779 | )
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Pro forma loss from continuing operations                                                          |  | $                                   | (9,999 | ) |                                     | $ | (4,713 | )    |  | $ | (18,627 | ) |  | $ | (8,175 | )
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) from discontinued operations as reported                                             |  | $                                   | 100    |   |                                     | $ | 34     |      |  | $ | 365     |   |  | $ | (50    | )
|Deduct: stock-based employee compensation income determined under fair value method for all awards |  |                                     |       |   |                                     |   |       |      |  |   |        |   |  |   | 7      |  
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Pro forma income (loss) from discontinued operations                                               |  |                                     | 100    |   |                                     |   | 34     |      |  |   | 365     |   |  |   | (43    | )
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Pro forma loss                                                                                     |  | $                                   | (9,899 | ) |                                     | $ | (4,679 | )    |  | $ | (18,262 | ) |  | $ | (8,218 | )
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted loss per share:                                                                  |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|As reported:                                                                                       |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Continuing operations                                                                              |  | $                                   | (0.54  | ) |                                     | $ | (0.29  | )    |  | $ | (1.00   | ) |  | $ | (0.45  | )
|Discontinued operations                                                                            |  |                                     | 0.01   |   |                                     |   |       |      |  |   | 0.02    |   |  |   |       |  
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Loss                                                                                               |  | $                                   | (0.53  | ) |                                     | $ | (0.29  | )    |  | $ | (0.98   | ) |  | $ | (0.45  | )
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Pro forma:                                                                                         |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Continuing operations                                                                              |  | $                                   | (0.65  | ) |                                     | $ | (0.36  | )    |  | $ | (1.22   | ) |  | $ | (0.63  | )
|Discontinued operations                                                                            |  |                                     | 0.01   |   |                                     |   |       |      |  |   | 0.02    |   |  |   |       |  
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  
|Loss                                                                                               |  | $                                   | (0.64  | ) |                                     | $ | (0.36  | )    |  | $ | (1.20   | ) |  | $ | (0.63  | )
|                                                                                                   |  |                                     |        |   |                                     |   |        |      |  |   |         |   |  |   |        |  



Reclassifications



Certain amounts in the 2004 financial statements have been reclassified
to conform to the 2005 presentation.



Recent Accounting Pronouncements



On June 7, 2005, FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS No. 154). SFAS No. 154 changes the
requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the
period of the change. SFAS No. 154 requires retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is
effective for accounting changes made in fiscal years beginning after December 15, 2005; however, SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. The Company does not believe adoption of SFAS No. 154
will have a material effect on its consolidated financial position, results of operations or cash flows.



8



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



Recent Accounting Pronouncements (continued)



SFAS No. 123 (revised 2004) Share-based Payment



In December 2004, FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS No. 123R), which
addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for employee share-based payment transactions using APB No. 25, and requires instead that such transactions be accounted
for using the grant-date fair value based method. SFAS No. 123R will be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 (July 1, 2005 for the Company). Early adoption of SFAS No. 123R is
encouraged.



On April 15, 2005, the SEC approved a new rule,
under which SFAS No. 123R is effective for public companies at the beginning of their next fiscal year that begins after June 15, 2005 (January 1, 2006 for the Company). SFAS No. 123R applies to all awards granted or modified after the effective
date of SFAS No. 123R. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the effective date of SFAS No. 123R shall be recognized on or after the effective date, as the related services
are rendered, based on the awards grant-date fair value as previously calculated for the pro forma disclosure under SFAS No. 123.



The Company estimates that the cumulative effect of adopting SFAS No. 123R as of its adoption date by the Company (January 1, 2006), based on the awards
outstanding as of June 30, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to June 30, 2005 and prior to the Companys adoption of SFAS
No. 123R. The Company expects that upon the adoption of SFAS No. 123R, it will apply the modified prospective application transition method, as permitted by SFAS No. 123R. Under such transition method, upon the adoption of SFAS No. 123R, the
Companys financial statements for periods prior to the effective date of SFAS No. 123R will not be restated. The impact in the 2006 fiscal year and beyond will depend upon various factors, among them the Companys future compensation
strategy.



In March 2005, the SEC issued Staff Accounting
Bulletin 107 (Shared-Based Payment) (SAB 107), which offers guidance on SFAS No. 123R. SAB 107 was issued to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing the
information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement SFAS No. 123R, specifically when valuing employee stock
options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include valuation models, expected volatility and expected term. The Company will
apply the principles of SAB 107 in conjunction with the Companys adoption of SFAS No. 123R.



2. Inventory



Inventory
is comprised of the following:



|                |  |              |       |                   |   |      
|--------------- |  | ------------ | ----- | ----------------- | - | -----
|                |  | June 30,2005 |       | December 31, 2004
|                |  | In thousands
|Raw materials   |  | $            | 1,151 |                   | $ | 1,598
|Work in process |  |              | 959   |                   |   | 533  
|Finished goods  |  |              | 789   |                   |   | 1,168
|                |  |              |       |                   |   |      
|                |  | $            | 2,899 |                   | $ | 3,299
|                |  |              |       |                   |   |      



9



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. Acquisition of Xtend



On June 30, 2004, the Company acquired all of the outstanding shares of Xtend (the Transaction). Xtend provides
infrastructure solutions that expand the bandwidth of cable television lines. The Transaction allowed the Company to diversify its business by adding a different segment to its wireless network business. The results of Xtends operations were
consolidated with the Companys operations commencing July 1, 2004.



In connection with the Transaction:



| |  |  | The Company issued 1,398,777 shares of the Companys common stock and made cash payments of approximately $3.0 million for non-competition agreements with certain Xtend
employees;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company provided a contingent promissory note (Contingent Note) in the principal amount of $6.5 million payable on March 31, 2007. In the event that the consolidated
revenues of the Company in the year ended December 31, 2006 equal or exceed $60.0 million and the consolidated gross margin of the Company equals or exceeds 35% during the same period, the Contingent Note shall be canceled. The Contingent Note is
subject to acceleration in the event that the excess sum of the Companys cash, cash equivalents, short-term investments and accounts receivables, net of the sum of the Companys long-term and short-term liabilities (exclusive of the
Contingent Note) is less than $20.0 million on December 31, 2005 or on June 30, 2006;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2005, the Company paid a cash bonus to an Xtend employee in the approximate amount of $1.2 million and, in July 2004, granted 146,000 shares of restricted stock to the
same employee, of which 71,000 shares have vested and 75,000 shares will vest subject to designated performance criteria;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company agreed to make cash payments to certain other Xtend option holders and Xtend employees in connection with those parties outstanding options to purchase shares of
Xtend common stock. These cash payments included a payment of approximately $269,000 paid in cash at the closing of the Transaction on June 30, 2004, and $255,000 to be paid as follows: $127,000 paid as of July 1, 2005 and $128,000 due on July 1,
2006;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As Xtend is a development stage enterprise that has not yet commenced its planned principal operations, the Company accounted for the Transaction as an acquisition of net assets
pursuant to the provisions of SFAS No. 142 Goodwill and Other Intangible Assets. Accordingly, the Company allocated the purchase price to the individual assets acquired and liabilities assumed, based on their relative fair values, and no
goodwill was recorded; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company incurred direct expenses related to the Transaction amounting to $0.6 million, which were capitalized as a part of the investment of Xtend.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



10



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



3. Acquisition of Xtend (continued)



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



The fair value of the intangible assets acquired was estimated by a qualified independent appraiser, based upon future
expected discounted cash-flows in the second quarter of 2005. If the Company were to determine in a future period that an impairment of intangible assets has occurred, the impairment measurement procedures could result in a charge for the impairment
of long-lived assets. As of June 30, 2005, the carrying value of the Companys intangible assets was $5.8 million.



Amortization of intangible assets acquired for the three and six months ended June 30, 2005 was $0.5 million and $1.0 million, respectively, consisting of
the amortization of existing technology of $0.1 million and $0.2 million respectively, non-competition agreements of $0.2 million and $0.4 million, respectively, an exclusive sales agreement of $0.1 million and $0.3 million respectively, and
workforce of $0.1 million and $0.1 million, respectively.



Estimated amortization expenses of intangible assets for the years subsequent to June 30, 2005 are as follows:



|                                                   |  |              |      
|-------------------------------------------------- |  | ------------ | -----
|                                                   |  | In thousands
|Period from July 1, 2005 through December 31, 2005 |  | $            | 896  
|2006                                               |  |              | 1,791
|2007                                               |  |              | 1,641
|2008                                               |  |              | 907  
|2009                                               |  |              | 366  
|2010                                               |  |              | 183  
|                                                   |  |              |      
|Total                                              |  | $            | 5,784
|                                                   |  |              |      



4. Shira - Discontinued Operation



Assets and liabilities of the discontinued operation are
as follows:



|                    |  |              |   |                  |   |    
|------------------- |  | ------------ | - | ---------------- | - | ---
|                    |  | June 30,2005 |   | December 31,2004
|                    |  | In thousands
|Current assets      |  | $            |  |                  | $ | 72 
|                    |  |              |   |                  |   |    
|Current liabilities |  | $            |  |                  | $ | 433
|                    |  |              |   |                  |   |    



Profit and loss of
the discontinued operation were as follows:



|                                          |  |                            |     |                          |   |      |  |   |      |   |  |   |     |  
|----------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | - | ---- | - |  | - | --- | -
|                                          |  | Three Months endedJune 30, |     | Six Months endedJune 30, |  
|                                          |  | 2005                       |     | 2004                     |   | 2005 |  |   | 2004 |  
|                                          |  | In thousands               |     | In thousands             |  
|Income (loss) from operation              |  | $                          |    |                          | $ | 32   |  | $ | (25  | ) |  | $ | (53 | )
|Other income (see (b) below)              |  |                            | 100 |                          |   |     |  |   | 390  |   |  |   |    |  
|Interest income, net                      |  |                            |    |                          |   | 2    |  |   |     |   |  |   | 3   |  
|                                          |  |                            |     |                          |   |      |  |   |      |   |  |   |     |  
|Income (loss) from discontinued operation |  | $                          | 100 |                          | $ | 34   |  | $ | 365  |   |  | $ | (50 | )
|                                          |  |                            |     |                          |   |      |  |   |      |   |  |   |     |  



11



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



4. Shira  Discontinued Operations (continued)



Profit and loss from discontinued operations includes:



(a) The Company did not incur any severance expenses or termination of
contractual obligations, accounted for according to SFAS No. 146 (Accounting for costs associated with exit or disposal activities), during the three and six months ended June 30, 2005. The Company settled all severance expenses and
termination of contractual obligations as of December 31, 2004. During the three and six months ended June 30, 2004 the Company paid $5,000 and $82,000, respectively, in severance expenses and termination of contractual obligations.



(b) On March 31, 2005 the Company sold all of its shares of Shira stock to
third parties (the Shira Purchasers). The Shira Purchasers are required to pay the Company 22.5% to 42.5% of the proceeds that may be received upon the subsequent sale by the Shira Purchasers of Shira or its assets. The Shira Purchasers
assumed all liabilities of Shira totaling $0.3 million. The gain from this sale was $0.3 million and was recorded in discontinued operations. In the second quarter of 2005, the Company received an additional $0.1 million from the Shira Purchasers.



5. Accrued Liabilities



Accrued liabilities consist of the following:



|                          |  |               |       |                  |   |      
|------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                          |  | June 30, 2005 |       | December 31,2004
|                          |  | In thousands 
|Withholding tax           |  | $             | 2,278 |                  | $ | 2,025
|Compensation and benefits |  |               | 2,025 |                  |   | 2,768
|Royalties                 |  |               | 954   |                  |   | 1,072
|Warranty *                |  |               | 236   |                  |   | 426  
|Other                     |  |               | 1,320 |                  |   | 1,254
|                          |  |               |       |                  |   |      
|                          |  | $             | 6,813 |                  | $ | 7,545
|                          |  |               |       |                  |   |      

---

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



|                                                         |  |                               |      |   |                             |   |      |  
|-------------------------------------------------------- |  | ----------------------------- | ---- | - | --------------------------- | - | ---- | -
|                                                         |  | Six Monthsended June 30, 2005 |      |   | Year ended December 31,2004 |  
|                                                         |  | In thousands                  |     
|Balance at beginning of period                           |  | $                             | 426  |   |                             | $ | 389  |  
|Product warranty issued for new sales                    |  |                               | 150  |   |                             |   | 380  |  
|Changes in accrual in respect of warranty periods ending |  |                               | (340 | ) |                             |   | (343 | )
|                                                         |  |                               |      |   |                             |   |      |  
|Balance at end of period                                 |  | $                             | 236  |   |                             | $ | 426  |  
|                                                         |  |                               |      |   |                             |   |      |  



12



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



6. Severance Liabilities



The amounts paid related to severance and severance expenses were:



|                                  |  |                            |     |                          |   |      |  |      |     |  |   |    
|--------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                  |  | Three Months endedJune 30, |     | Six Months endedJune 30,
|                                  |  | 2005                       |     | 2004                     |   | 2005 |  | 2004
|                                  |  | In thousands               |     | In thousands            
|Amounts paid related to severance |  | $                          | 181 |                          | $ | 142  |  | $    | 325 |  | $ | 282
|                                  |  |                            |     |                          |   |      |  |      |     |  |   |    
|Severance expenses*               |  | $                          | 329 |                          | $ | 182  |  | $    | 503 |  | $ | 279
|                                  |  |                            |     |                          |   |      |  |      |     |  |   |    

---

|* | With respect to the Companys Israeli employees, as of June 30, 2005 the Company expects to contribute $0.3 million to a defined contribution plan and $0.2 million to insurance
and pension plans for the year ended December 31, 2005 (includes amounts contributed in the six months ended June 30, 2005).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7. Contingency



With respect to the contingent consideration related to acquisition of Xtend, see note 3.



8. Former Chief Executive Officer Separation Agreement



In April 2002, pursuant to a separation agreement entered into in October 2001 and as part of a restructuring program that
the Company implemented in 2001, the Companys former Chief Executive Officer borrowed $1.0 million. This loan is due on January 1, 2006, or earlier upon the sale of shares of the Companys common stock held by such officer or upon certain
other circumstances. The loan is secured solely by the option to purchase 266,667 shares of the Companys common stock and the underlying shares held by such officer.



The Company applied combined accounting to these options and the related loan secured by such options. This results in
variable accounting for the stock options, with a minimum expense being recorded of $1.0 million. The total adjustments for the three and six months ended June 30, 2005 associated with these options were $0.1 million and $0.4 million, respectively.
The Company recorded the charges as restructuring adjustments.



As of June 30, 2005, the former Chief Executive Officer had exercised all of these stock options and, upon the sale of some of the underlying shares of common stock, paid the Company $0.2 million of the aggregate amount borrowed. Since
these options have been exercised, the Company no longer accounts for these stock options under Variable Plan accounting.



9. Comprehensive Loss



The components of comprehensive loss are as follows:



|                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                 |  | Three Months ended June 30, |        |   | Six Months ended June 30, |  
|                                                 |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|                                                 |  | In thousands                |        |   | In thousands              |  
|Loss                                             |  | $                           | (8,225 | ) |                           | $ | (3,816 | )    |  | $ | (14,963 | ) |  | $ | (5,961 | )
|Unrealized loss on available-for-sale securities |  |                             | 95     |   |                           |   | (179   | )    |  |   | 71      |   |  |   | (213   | )
|                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive loss                               |  | $                           | (8,130 | ) |                           | $ | (3,995 | )    |  | $ | (14,892 | ) |  | $ | (6,174 | )
|                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  



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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



10. Segment Reporting



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



|                                                             |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                             |  | Three Months ended June 30, |        |   | Six Months ended June 30, |  
|                                                             |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|                                                             |  | In thousands                |        |   | In thousands              |  
|Consolidated revenues from the Wireless Network segment      |  | $                           | 1,152  |   |                           | $ | 2,386  |      |  | $ | 1,856   |   |  | $ | 4,611  |  
|                                                             |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Operating loss from continuing operations:                   |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Wireless Network                                             |  |                             | 4,461  |   |                           |   | 3,954  |      |  |   | 7,999   |   |  |   | 6,268  |  
|Cable                                                        |  |                             | 3,984  |   |                           |   |       |      |  |   | 7,525   |   |  |   |       |  
|                                                             |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Total consolidated operating loss from continuing operations |  |                             | (8,445 | ) |                           |   | (3,954 | )    |  |   | (15,524 | ) |  |   | (6,268 | )
|Interest income, net                                         |  |                             | 120    |   |                           |   | 104    |      |  |   | 196     |   |  |   | 357    |  
|                                                             |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Loss from continuing operations                              |  | $                           | (8,325 | ) |                           | $ | (3,850 | )    |  | $ | (15,328 | ) |  | $ | (5,911 | )
|                                                             |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  



|                         |  |                  |        |                  |   |       
|------------------------ |  | ---------------- | ------ | ---------------- | - | ------
|Assets:                  |  |                  |        |                  |   |       
|                         |  | June 30,    2005 |        | December 31,2004
|                         |  | In thousands    
|Wireless Network         |  | $                | 32,396 |                  | $ | 47,991
|Cable:                   |  |                  |        |                  |   |       
|Intangible assets        |  |                  | 5,784  |                  |   | 6,802 
|Other assets             |  |                  | 2,815  |                  |   | 1,306 
|                         |  |                  |        |                  |   |       
|                         |  |                  | 8,599  |                  |   | 8,108 
|                         |  |                  |        |                  |   |       
|Eliminations/adjustments |  |                  |       |                  |   | 72    
|                         |  |                  |        |                  |   |       
|                         |  | $                | 40,995 |                  | $ | 56,171
|                         |  |                  |        |                  |   |       



|                                    |  |                            |     |                          |   |      |  |      |       |  |   |    
|----------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | ---
|                                    |  | Three Months endedJune 30, |     | Six Months endedJune 30,
|                                    |  | 2005                       |     | 2004                     |   | 2005 |  | 2004
|                                    |  | In thousands               |     | In thousands            
|Expenditures for long-lived assets: |  |                            |     |                          |   |      |  |      |       |  |   |    
|Wireless Network                    |  | $                          | 165 |                          | $ | 286  |  | $    | 208   |  | $ | 357
|Cable                               |  |                            | 285 |                          |   |     |  |      | 796   |  |   |   
|                                    |  |                            |     |                          |   |      |  |      |       |  |   |    
|                                    |  | $                          | 450 |                          | $ | 286  |  | $    | 1,004 |  | $ | 357
|                                    |  |                            |     |                          |   |      |  |      |       |  |   |    



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



10. Segment Reporting (continued)



|                                        |  |                            |     |                          |   |      |  |      |       |  |   |    
|--------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | ---
|                                        |  | Three Months endedJune 30, |     | Six Months endedJune 30,
|                                        |  | 2005                       |     | 2004                     |   | 2005 |  | 2004
|                                        |  | In thousands               |     | In thousands            
|Depreciation and amortization expenses: |  |                            |     |                          |   |      |  |      |       |  |   |    
|Wireless Network                        |  | $                          | 159 |                          | $ | 144  |  | $    | 323   |  | $ | 274
|                                        |  |                            |     |                          |   |      |  |      |       |  |   |    
|Cable:                                  |  |                            |     |                          |   |      |  |      |       |  |   |    
|Intangible assets                       |  |                            | 509 |                          |   |     |  |      | 1,018 |  |   |   
|Other assets                            |  |                            | 87  |                          |   |     |  |      | 175   |  |   |   
|                                        |  |                            |     |                          |   |      |  |      |       |  |   |    
|                                        |  |                            | 596 |                          |   |     |  |      | 1,193 |  |   |   
|                                        |  |                            |     |                          |   |      |  |      |       |  |   |    
|                                        |  | $                          | 755 |                          | $ | 144  |  | $    | 1,516 |  | $ | 274
|                                        |  |                            |     |                          |   |      |  |      |       |  |   |    



The following is a
summary of operations within geographic areas based on the location of the customers:



|                                                                                                          |  |                            |       |                          |   |       |  |      |       |  |   |      
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                                          |  | Three Months endedJune 30, |       | Six Months endedJune 30,
|                                                                                                          |  | 2005                       |       | 2004                     |   | 2005  |  | 2004
|                                                                                                          |  | In thousands               |       | In thousands            
|Revenues from sales to unaffiliated customers from continuing operations in the Wireless Network segment: |  |                            |       |                          |   |       |  |      |       |  |   |      
|North America                                                                                             |  | $                          | 905   |                          | $ | 416   |  | $    | 1,262 |  | $ | 731  
|Asia                                                                                                      |  |                            | 237   |                          |   | 1,521 |  |      | 538   |  |   | 3,336
|Rest of the world                                                                                         |  |                            | 10    |                          |   | 449   |  |      | 56    |  |   | 544  
|                                                                                                          |  |                            |       |                          |   |       |  |      |       |  |   |      
|                                                                                                          |  | $                          | 1,152 |                          | $ | 2,386 |  | $    | 1,856 |  | $ | 4,611
|                                                                                                          |  |                            |       |                          |   |       |  |      |       |  |   |      



|                            |  |                  |       |                  |   |      
|--------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                            |  | June 30,    2005 |       | December 31,2004
|                            |  | In thousands    
|Property and equipment, net |  |                  |       |                  |   |      
|Israel                      |  | $                | 1,490 |                  | $ | 1,053
|United States               |  |                  | 268   |                  |   | 199  
|                            |  |                  |       |                  |   |      
|                            |  | $                | 1,758 |                  | $ | 1,252
|                            |  |                  |       |                  |   |      



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##### Table of Contents

Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)



10. Segment Reporting (continued)



Sales to major customers in the Wireless Network segment out of total revenues are as follows:



|           |  |                            |   |  |                          |   |  |      |   |  |      |  
|---------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|           |  | Three Months endedJune 30, |   |  | Six Months endedJune 30, |  
|           |  | 2005                       |   |  | 2004                     |   |  | 2005 |   |  | 2004 |  
|Customer A |  | 66                         | % |  | 17                       | % |  | 50   | % |  | 15   | %
|Customer B |  | 13                         | % |  | 16                       | % |  | 10   | % |  | 15   | %
|Customer C |  | 2                          | % |  |                         |   |  | 10   | % |  |     |  
|Customer D |  |                           |   |  | 3                        | % |  | 2    | % |  | 17   | %
|Customer E |  |                           |   |  |                         |   |  | 9    | % |  | 10   | %
|Customer F |  |                           |   |  | 44                       | % |  |     |   |  | 28   | %
|Customer G |  |                           |   |  | 17                       | % |  |     |   |  | 9    | %



11. Subsequent Event



On August 8, 2005, the Companys management began
the implementation of a cost reduction program. The Company reviewed the size and composition of its workforce and made adjustments after evaluating a variety of factors. In connection with this cost reduction program, the Company has reduced its
workforce by approximately 16% (when compared to the workforce levels as of June 30, 2005) in the third quarter of 2005. The Company expects to record approximately $0.3 million in a one-time cash severance payment and related expenses. This cost
reduction does not require the termination of any contractual obligations or require the Company to incur other material associated costs.



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##### Table of Contents

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



Overview



Vyyo Inc. and its wholly-owned subsidiaries (collectively, we, us or our) provide cable and wireless broadband access
solutions through two business segments. Our products are designed for use by utilities, cable television and telecommunication operators, wireless ISPs and enterprise. Our Wireless Network segment enables utilities to operate secure
wireless networks for communications and SCADA (Supervisory Control And Data Acquisition) of their remote assets. Cable television and telecommunication operators, wireless ISPs and enterprise use our Cable segments Data Over Cable
System Interface Specification (DOCSIS®)-based
solutions to deliver telephony (T1/E1), high-speed data and voice over Internet protocol (VOIP) to business and residential subscribers. Our cable bandwidth expansion solutions are designed to expand cable operators typical HFC
(hybrid-fiber coax) network capacity in the last mile by up to two times in the downstream and up to ten times in the upstream, addressing bandwidth demand for T1and other advanced services.



Our Cable segment represents the results of operations of Xtend Networks
Ltd., an Israeli privately-held development stage company, and its wholly-owned, U.S.-based subsidiary, Xtend Networks Inc. (collectively, Xtend), which were consolidated with our operations commencing July 1, 2004, and provides
infrastructure solutions that expand the bandwidth of cable television lines.



We are focused on promoting our Wireless Network solutions in the utility, petrochemical, municipality and enterprise markets. Our Cable segment is focused on both promoting T1 solutions for commercial services over
cable networks and promoting cable bandwidth expansion solutions that are designed to expand cable operators typical HFC network capacity. These opportunities, however, are developing slowly.



We have incurred substantial losses since commencing operations, and as of
June 30, 2005, we had an accumulated deficit of $211.4 million. We have not achieved profitability. As we continue to build our customer and revenue base we expect to continue to incur net losses. We will need to generate significantly higher
revenues to support research and development, sales and marketing and general and administrative expenses, and to achieve and maintain profitability. We are likely to require additional funding and there is no guarantee that such funding will be
available to us. See Liquidity, Capital Resources and Going Concern Considerations.



On June 30, 2004, we completed the acquisition of all of the outstanding shares of Xtend. The acquisition of Xtend allows us to diversify our business and
to seek to open new markets for our current products.



We
provided a contingent promissory note to the former Xtend stockholders (Contingent Note) in the principal amount of $6.5 million payable on March 31, 2007. In the event that our consolidated revenues in the year ended December 31, 2006
equal or exceed $60.0 million and our consolidated gross margin equals or exceeds 35% during the same period, the Contingent Note will be canceled. The Contingent Note is subject to acceleration in the event that the excess sum of our cash, cash
equivalents, short-term investments and accounts receivables, net of the sum of our long-term and short-term liabilities (exclusive of the Contingent Note) is less than $20.0 million on December 31, 2005 or on June 30, 2006.



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##### Table of Contents

In January 2005, we paid a cash bonus to an Xtend employee of approximately $1.2 million and, in July
2004, granted 146,000 shares of restricted stock to the same employee, of which 71,000 shares have vested and 75,000 shares will vest subject to designated performance criteria.



We made cash payments to certain other Xtend option holders and Xtend employees in connection with the cancellation of those
parties outstanding options in Xtend. These cash payments included a payment of approximately $269,000 paid in cash at the closing of the acquisition, and $255,000 to be paid as follows: $127,000 paid as of July 1, 2005 and $128,000 due on
July 1, 2006.



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



The fair value of the intangible assets acquired was estimated by a qualified independent appraiser, based upon future expected discounted cash-flows in
the second quarter of 2005. If we were to determine in a future period that an impairment of intangible assets has occurred, the impairment measurement procedures could result in a charge for the impairment of long-lived assets. As of June 30, 2005,
the carrying value of our intangible assets was $5.8 million.



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



Amortization of intangible assets acquired for the three and six months ended June 30, 2005 was $0.5 million and $1.0 million, respectively, consisting of the amortization of existing technology of $0.1 million and $0.2 million,
respectively, non-competition agreements of $0.2 million and $0.4 million, respectively, an exclusive sales agreement of $0.1 million and $0.3 million, respectively, and workforce of $0.1 million and $0.1 million, respectively.



Estimated future amortization expenses are as follows:



|                                                   |  |              |      
|-------------------------------------------------- |  | ------------ | -----
|                                                   |  | In thousands
|Period from July 1, 2005 through December 31, 2005 |  | $            | 896  
|2006                                               |  |              | 1,791
|2007                                               |  |              | 1,641
|2008                                               |  |              | 907  
|2009                                               |  |              | 366  
|2010                                               |  |              | 183  
|                                                   |  |              |      
|Total                                              |  | $            | 5,784
|                                                   |  |              |      



Subsequent Event



On August 8, 2005, our management began the implementation of a cost
reduction program. We reviewed the size and composition of our workforce and made adjustments after evaluating a variety of factors. In connection with this cost reduction program, we have reduced our workforce by approximately 16% in the United
States and Israel (when compared to the workforce levels as of June 30, 2005) in the third quarter of 2005. We expect to record approximately $0.3 million in a one-time cash severance payment and related expenses. This cost reduction does not
require the termination of any contractual obligations or require us to incur other material associated costs.



Critical Accounting Policies



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



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Our critical accounting policies are described in the notes to the annual consolidated financial
statements as of and for the year ended December 31, 2004. We determined the critical policies by considering accounting policies that involve the most complex or subjective decisions or assessments. We believe our most critical accounting policies
include the following:



Revenue Recognition



Revenues from our Wireless Network segment and Cable segment are derived
from sales of products. As of June 30, 2005, our revenues from services were not significant. Our products are off-the-shelf products, sold as is, without further adjustment or installation. These products are usually sold individually
according to a standard fixed price determined by us. When establishing a relationship with a new customer, we also may sell these products together as a package, in which case these products are shipped at the same time to the customer. Our
products are off-the-shelf products; accordingly, we do not recognize revenue when our customers have the right of return or any additional services are not delivered (except for our standard product warranty).



We record revenues from our products when (a) persuasive evidence of an
arrangement exists; (b) delivery has occurred and customer acceptance requirements have been met, if any, and we have no additional obligations; (c) the price is fixed or determinable; and (d) collection of payment is reasonably assured.



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



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



Short-Term Investments



Pursuant to SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, we have designated our investments in debt securities as available-for-sale. Available-for-sale securities are carried at fair value, which is determined based upon the quoted market prices of the securities, with
unrealized gains and losses reported in accumulated other comprehensive income (loss), a component of stockholders equity until realized. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income, net. We view our available-for-sale portfolio as available for use in our current operations. Accordingly, we have classified all investments as short-term under short-term investments, even
though the stated maturity date may be one year or more beyond the current balance sheet date. Interest, amortization of premiums, accretion of discounts and dividends on securities classified as available-for-sale are included in interest income,
net.



In March 2004, FASB issued EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments which provides guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes annual disclosure
requirements for investments that are deemed temporarily impaired. In September 2004, FASB delayed the accounting provisions of EITF Issue No. 03-1 (however, the disclosure requirements remain effective). We will evaluate the effect, if any, of EITF
Issue No. 03-1 when final guidance is released. We recognize an impairment charge when the decline in the fair values of these investments below their cost basis are deemed to be other-than-temporary. We consider various factors in determining
whether to recognize an impairment charge, including the length of time and the extent to which the fair value has been below the cost basis, the current financial condition of the investee and our intent and ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery in market value. We have recorded expenses of $23,000 and $135,000, respectively, for the three and six months ended June 30, 2005 for an other-than-temporary impairment in our
available-for-sale securities.



Inventory



During the three months ended June 30, 2005, we recorded a write-down of
inventory of $0.35 million. We took this write-down to account for excess inventory resulting from our increased focus on providing products to utility and cable customers. Inventory is valued at the lower of cost or market. Cost includes the cost
of raw materials computed using the moving average basis and, for work in progress and finished goods, direct labor as well. Market is determined by reference to the sales proceeds of items sold in the ordinary course of business or management
estimates based on prevailing market conditions.



Product
Warranty



We accrue for product warranty costs at the same
time that we recognize product revenues. The provision is calculated as a percentage of the sales based on historical experience.



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Intangible Assets



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



Recent Accounting Pronouncements



On June 7, 2005, FASB issued Statement No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS No. 154). SFAS No. 154 changes the requirements for the accounting
for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No.
154 requires retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005; however, SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. We do not believe adoption of SFAS No. 154 will have a material effect on our
consolidated financial position, results of operations or cash flows.



SFAS No. 123 (revised 2004) Share-based Payment



In December 2004, FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS No. 123R), which addresses the accounting for share-based payment transactions in which we obtain employee services in exchange for
(a) our equity instruments or (b) liabilities that are based on the fair value of our equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for employee share-based
payment transactions using APB No. 25, and requires instead that such transactions be accounted for using the grant-date fair value based method. SFAS No. 123R will be effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005 (July 1, 2005 for us). Early adoption of SFAS No. 123R is encouraged.



On April 15, 2005, the SEC approved a new rule, under which SFAS No. 123R is effective for public companies at the beginning of their next fiscal year
that begins after June 15, 2005 (January 1, 2006 for us). SFAS No. 123R applies to all awards granted or modified after the effective date of SFAS No. 123R. In addition, compensation cost for the unvested portion of previously granted awards that
remain outstanding on the effective date of SFAS No. 123R shall be recognized on or after the effective date, as the related services are rendered, based on the awards grant-date fair value as previously calculated for the pro forma disclosure
under SFAS No. 123.



We estimate that the cumulative effect of
adopting SFAS No. 123R as of our adoption date (January 1, 2006), based on the awards outstanding as of June 30, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which
may occur subsequent to June 30, 2005 and prior to our adoption of SFAS No. 123R. We expect that upon the adoption of SFAS No. 123R, we will apply the modified prospective application transition method, as permitted by SFAS No. 123R. Under such
transition method, upon the adoption of SFAS No. 123R, our financial statements for periods prior to the effective date of SFAS No. 123R will not be restated. The impact in the 2006 fiscal year and beyond will depend upon various factors, among them
our future compensation strategy.



In March 2005, the SEC
issued Staff Accounting Bulletin 107 (Shared-Based Payment) (SAB 107), which offers guidance on SFAS No. 123R. SAB 107 was issued to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while
enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement SFAS No. 123R, specifically when valuing
employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include valuation models, expected volatility and expected term. We
will apply the principles of SAB 107 in conjunction with our adoption of SFAS No. 123R.



Results of Operations



Revenues



Revenues decreased to $1.2 million in the second quarter
of 2005 from $2.4 million in the second quarter of 2004, and to $1.9 million in the first six months of 2005 from $4.6 million in the first six months of 2004. The decrease in revenues in the



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second quarter and in the first six months of 2005 was due to the decreased shipments of our products as well as lower selling prices as a result of
competitive price pressure. For the three and six months ended June 30, 2005, revenues do not include revenues from sales of inventory that were previously written down to $0. During the three and six months ended June 30, 2004, revenues include
revenues from sales of inventory that were previously written down in the amount of $0.4 million and $1.0 million, respectively.



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



|           |  |                            |   |  |                          |   |  |      |   |  |      |  
|---------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|           |  | Three Months endedJune 30, |   |  | Six Months endedJune 30, |  
|           |  | 2005                       |   |  | 2004                     |   |  | 2005 |   |  | 2004 |  
|Customer A |  | 66                         | % |  | 17                       | % |  | 50   | % |  | 15   | %
|Customer B |  | 13                         | % |  | 16                       | % |  | 10   | % |  | 15   | %
|Customer C |  | 2                          | % |  |                         |   |  | 10   | % |  |     |  
|Customer D |  |                           |   |  | 3                        | % |  | 2    | % |  | 17   | %
|Customer E |  |                           |   |  |                         |   |  | 9    | % |  | 10   | %
|Customer F |  |                           |   |  | 44                       | % |  |     |   |  | 28   | %
|Customer G |  |                           |   |  | 17                       | % |  |     |   |  | 9    | %



Cost of Revenues



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



Cost of revenues increased to $1.4 million in the second quarter of 2005 from $1.2 million in the second quarter of 2004 and was $2.2 million in the six months ended June 30, 2005 and 2004. The increase in cost of
revenues in the second quarter of 2005 was primarily attributable to the increase in workforce. In addition, for the three and six months ended June 30, 2005 we included in cost of revenues the amortization of technology of $0.1 million and $0.2
million, respectively. For the three months ended June 30, 2005, we recorded a write-down of inventory of $0.35 million. We took this write-down to account for excess inventory resulting from our increased focus on providing products to utility and
cable customers. In addition, on November 4, 2004, two of our subsidiaries entered into new leases at increased rent and fee payments. These subsidiaries moved into their new locations during the second quarter of 2005. As a result of the write-down
of inventories to $0 in 2001, cost of revenues does not include $0.1 million in the second quarter of 2004, as well as $0.4 million in the first six months of 2004, related to the sale of such inventories. Our gross margin in the second quarter of
2005 decreased from our gross margin in the second quarter of 2004 primarily due to competitive price pressure in our markets and decreased shipments which resulted in an increase in our fixed costs. We anticipate that our gross margins will
continue to fluctuate and that our cost of revenues will increase in future periods to the extent that we deplete our previously written-down inventories and sell products from newly-acquired inventories.



Research and Development



Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities. Substantially all of our research and development activities are carried out in our facilities in Israel. These expenses are charged to operations as incurred. Our
research and development expenses increased to $2.9 million in the second quarter of 2005 from $1.3 million in the second quarter of 2004 and to $5.6 million in the first six months of 2005 from $2.5 million in the first six months of 2004. Research
and development expenses include approximately $1.6 million from the Cable segment in the second quarter of 2005. The increase in research and development expenses in the three and six months of 2005 was due to our research and development efforts
for our new Cable segment as well as an increase in our workforce resulting from the acquisition of Xtend. For a description of additional costs related to the relocation of our Israeli facilities, see Cost of Revenues above. We
anticipate that research and development expenses will decrease in future periods after considering our August 2005 reduction in workforce.



Acquisition of Research and Development in-Process



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



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Sales and Marketing



Sales and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and
expenses for travel, trade shows and promotional activities. Sales and marketing expenses increased to $3.1 million in the second quarter of 2005 from $1.2 million in the second quarter of 2004 and to $5.8 million in the first six months of 2005
from $2.6 million in the first six months of 2004. The increase in sales and marketing expenses in the second quarter and the first six months of 2005 was due to (a) approximately $1.7 million attributable to the new Cable segment in the second
quarter of 2005, including expenses for market research, (b) an increase in sales efforts for our wireless products in the utilities and gas markets and other new markets, (c) an increase in our workforce and (d) an increase in expenses for
participation in several exhibitions. We anticipate that sales and marketing expenses will increase in future periods as we increase our efforts to sell our products. As for additional costs related to the relocation of our Israeli facilities, see
Cost of Revenues above.



General and
Administrative



General and administrative expenses
consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development and legal. General and administrative expenses increased to $1.9 million in the second quarter of
2005 from $1.3 million in the second quarter of 2004 and to $3.3 million in the first six months of 2005 from $2.7 million in the first six months of 2004. We expect general and administrative expenses to be higher in 2005 compared to 2004 as we
continue to implement internal controls over financial reporting relating to compliance with the Sarbanes-Oxley Act of 2002. General and administrative expenses also included expenses of $0.5 million in the second quarter of 2005, and $0.6 million
in the second quarter of 2004, which includes payments to Harmony Management, Inc., a corporation owned by Davidi Gilo, our Chief Executive Officer, pursuant to an aircraft time sharing agreement and to an unaffiliated third party management
company, in connection with several charters of an aircraft for business travel purposes. As for additional costs related to the relocation of our Israeli facilities, see Cost of Revenues above.



Amortization of Intangible Assets



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



Amortization of intangible assets acquired for the three
and six months ended June 30, 2005 was $0.5 million and $1.0 million, respectively, consisting of the amortization of existing technology of $0.1 million and $0.2 million, respectively, non-competition agreements of $0.2 million and $0.4 million,
respectively, an exclusive sales agreement of $0.1 million and $0.3 million, respectively, and workforce of $0.1 million and $0.1 million, respectively.



Restructuring Charges



In 2001, we implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in the telecommunications sector
and the general economy. In connection with the restructuring program, we recorded restructuring income in the second quarter of 2005 of $0.1 million from a positive adjustment with respect to a variable compensation plan related to our former Chief
Executive Officer. There are no other severance expenses or termination of contractual obligations payments attributable to the restructuring. As of June 30, 2005 the former Chief Executive Officer exercised all of his stock options. Since these
options have been exercised, we no longer account for these stock options under Variable Plan accounting.



Interest Income, Net



Interest income, net, includes interest from investment income, foreign currency remeasurement gains and losses. Net interest income was $120,000 in the
second quarter of 2005 and $104,000 in the second quarter of 2004. Net interest income was $196,000 in the first six months of 2005 and $357,000 in the first six months of 2004. Interest income for the second quarter of 2005 was offset due to an
Other-Than-Temporary investment impartment of $23,000 attributable to the effect of rising interest rates on our fixed interest debt investments that potentially may not be held until maturity. Our interest income is derived from our cash and
short-term investment balances. We expect that our interest income will continue to decrease due to decreasing cash balances.



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Income Taxes



As of December 31, 2004, our Israeli subsidiaries (excluding Shira) had net operating loss carryforwards of approximately
$84.0 million. The Israeli loss carryforwards have no expiration date.



Our Israeli subsidiaries (the Subsidiaries) have been granted approved enterprise status for several investment programs. The approved enterprise status entitles the Subsidiaries to receive tax exemption
periods, ranging from two to six years, on undistributed earnings commencing in the year in which the Subsidiaries attain taxable income. In addition, this approved enterprise status provides a reduced corporate tax rate of between 10%
to 25% (as opposed to the usual Israeli corporate tax rate of 34% for 2005) for the remaining term of the investment program depending on the proportion of foreign investment made in the particular project.



Since the Subsidiaries have no taxable income, the tax exemption periods have
not yet commenced. The Subsidiaries losses are expected to offset certain future earnings of the Subsidiaries, if attained, during the tax exemption periods; therefore, the utilization of the net operating losses will generate no tax benefits.
Accordingly deferred tax assets from such losses have not been included in our condensed consolidated financial statements. The entitlement to the above benefits is conditional upon the Subsidiaries fulfilling the conditions stipulated by the
Israeli Encouragement of Capital Investment Law of 1959 regulations published thereunder and the specific instruments of approval for the Subsidiaries. We have provided a full valuation allowance against our United States federal and state deferred
tax assets as the future realization of the tax benefit is not sufficiently assured.



Charges for Stock-Based Compensation



Charges for stock-based compensation represent the amortization of deferred compensation charges which are based on the aggregate differences between the respective exercise price of stock options and the purchase
price of the underlying common stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting purposes. Deferred stock compensation is amortized over the vesting period of the stock options. Net income
related to stock-based compensation of $39,000 in the second quarter of 2005 and $300,000 in the first six months of 2005 resulted from (a) a separation agreement (including income adjustments of $93,000 in the second quarter of 2005 and $408,000 in
the first six months of 2005 associated with the termination of our former Chief Executive Officer recorded as a restructuring adjustment) and (b) stock option grants to service providers accounted for on the fair value based method.



Discontinued Operation



Assets and liabilities of the discontinued operation were as follows:



|                    |  |                  |   |                  |   |    
|------------------- |  | ---------------- | - | ---------------- | - | ---
|                    |  | June 30,    2005 |   | December 31,2004
|                    |  | In thousands    
|Current assets      |  | $                |  |                  | $ | 72 
|                    |  |                  |   |                  |   |    
|Current liabilities |  | $                |  |                  | $ | 433
|                    |  |                  |   |                  |   |    



Profit and loss of the
discontinued operation were as follows:



|                                          |  |                            |     |                          |   |      |  |   |      |   |  |   |     |  
|----------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | - | ---- | - |  | - | --- | -
|                                          |  | Three Months endedJune 30, |     | Six Months endedJune 30, |  
|                                          |  | 2005                       |     | 2004                     |   | 2005 |  |   | 2004 |  
|                                          |  | In thousands               |     | In thousands             |  
|Income (loss) from operation              |  | $                          |    |                          | $ | 32   |  | $ | (25  | ) |  | $ | (53 | )
|Other income (see b below)                |  |                            | 100 |                          |   |     |  |   | 390  |   |  |   |    |  
|Interest income, net                      |  |                            |    |                          |   | 2    |  |   |     |   |  |   | 3   |  
|                                          |  |                            |     |                          |   |      |  |   |      |   |  |   |     |  
|Income (loss) from discontinued operation |  | $                          | 100 |                          | $ | 34   |  | $ | 365  |   |  | $ | (50 | )
|                                          |  |                            |     |                          |   |      |  |   |      |   |  |   |     |  



Profit and loss from
discontinued operation includes:



(a) We did not incur any
severance expenses or termination of contractual obligations, accounted for according to SFAS No. 146 (Accounting for costs associated with exit or disposal activities), during the three and six months ended June 30, 2005.



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We settled all severance expenses and termination of contractual obligations as of December 31, 2004. During the three and six months ended June 30, 2004, we
paid $5,000 and $82,000, respectively, in severance expenses and termination of contractual obligations.



(b) On March 31, 2005, we sold all of our shares of Shira stock to third parties (hereafter the Shira Purchasers). The Shira Purchasers are
required to pay to us 22.5% to 42.5% of the proceeds that may be received upon the subsequent sale by the Shira Purchasers of Shira or its assets. The Shira Purchasers assumed all liabilities of Shira totaling $0.3 million. The gain from this sale
was $0.3 million and was recorded in discontinued operations. In the second quarter of 2005, we received an additional $0.1 million from the Shira Purchasers.



Liquidity, Capital Resources and Going Concern Considerations



Our financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. We have experienced a significant loss from operations. For the six-month period ended June 30, 2005, we incurred a net loss of $15.0 million and had an accumulated deficit of $211.4 million. Our ability to continue as a
going concern will depend upon our ability to raise additional capital or attain profitable operations. We are considering raising additional capital to fund our operations. In addition, we are seeking to expand our revenue base by adding new
customers and further reducing expenses. Failure to secure additional capital or to expand our revenue base would likely result in depleting our available funds and not being able to pay our obligations when they become due. The accompanying
condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our possible
inability to continue as a going concern.



As of June 30, 2005,
we had $27.3 million of cash, cash equivalents and short-term investments. In the first six months of 2005, net cash used in operations was $14.6 million, comprised mainly of (a) our loss of $15.0 million, (b) changes related to an increase in
accounts receivable and other current assets of $0.3 million and $0.4 million, respectively, and a decrease of accrued liabilities of $0.7 million, offset mainly by a decrease in inventory of $0.4 million and an increase in other working capital
accounts of $0.2 million and (c) non-cash charges of $1.2 million related mainly to depreciation and amortization of $1.5 million offset by $0.3 million related to stock-based compensation. In the first six months of 2004, net cash used in
operations was $5.5 million comprised mainly of our net loss of $6.0 million.



In the first six months of 2005, net cash provided by investing activities was $12.7 million comprised of our sales and maturities of short-term investments net of our purchase of short-term investments of $13.7
million, partially offset by an outflow from purchases of property and equipment of $1.0 million. In the first six months of 2004, net cash provided by investing activities was approximately $9.7 million, comprised of: (a) our sales and maturities
of short-term investments net our purchase of short-term investments of $8.5 million and (b) net cash from the acquisition Xtend of $1.6 million, partially offset by an outflow from purchases of property and equipment of $0.4 million.



Financing activities in the first six months of 2005 amounted to
approximately $0.5 million attributable to proceeds from stock option exercises and notes receivable from stockholders. Financing activities in the first six months of 2004 amounted to approximately $0.6 million attributable to proceeds from stock
option exercises.



Our capital requirements depend on numerous
factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products and other factors. During the next 12 months, we expect that we will need to raise additional capital to
execute our business plan and to provide adequate working capital to satisfy our business objectives and requirements. If we raise additional funds through the issuance of equity or convertible debt securities, we may be required to do so at a price
per share below then-current trading prices thereby diluting our current stockholders. We may not be able to obtain additional funds on acceptable terms, or at all. This potential inability to raise funds on acceptable terms could seriously harm our
business. If we cannot raise needed funds on acceptable terms, we may not be able to execute our business plan or to continue as a going concern.



We have purchase obligations to our suppliers that support our operations in the normal cause of our business. The obligations require us to purchase
minimum quantities of the suppliers products at a specified price. As of December 31, 2004 and June 30, 2005, we had approximately $2.6 million and $2.2 million, respectively, of purchase obligations. These obligations are expected to become
payable at various times through 2005.



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Forward-Looking Statements



You should read Managements Discussion and Analysis of Financial Condition and Results of Operations in conjunction
with the consolidated financial statements and accompanying notes appearing elsewhere in our Quarterly Report on Form 10-Q. The matters addressed in Managements Discussion and Analysis of Financial Condition and Results of Operations, with the
exception of the historical information presented, contain forward-looking statements involving risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of
operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include:



| |  |  | our expectation that we will continue to incur net losses;
| | - |  | ----------------------------------------------------------



| |  |  | our belief that we will need to generate significantly higher revenues to support research and development, sales and marketing and general and administrative expenses, and to
achieve and maintain profitability;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that, if we were to determine in a future period that an impairment of intangible assets had occurred, the impairment measurement procedures could result in a charge for
the impairment of long-lived assets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that we will record approximately $0.3 million in a one-time cash severance payment and related expenses due to our recent workforce reduction;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that our most critical accounting policies include policies related to revenue recognition, short-term investments, inventory, product warranties and intangible assets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that the adoption of SFAS No. 154 will not have a material effect on our consolidated financial position, results of operations or cash flow;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our estimation that the cumulative effect of adopting SFAS No. 123R as of our adoption date (January 1, 2006), based on the awards of stock options outstanding as of June 30, 2005,
will not be material;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that upon the adoption of SFAS No. 123R, we will apply the modified prospective application transition method, as permitted by SFAS No. 123R;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipation that, although our principal revenue-generating customers are likely to vary on a quarterly basis, our revenues will remain concentrated among a few customers for
the foreseeable future;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipation that our gross margins will continue to fluctuate and that our cost of revenues will increase in future periods to the extent that we deplete our previously
written-down inventories and sell products from newly-acquired inventories;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipation that our research and development expenses will decrease in future periods given our August 2005 reduction in workforce;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipation that sales and marketing expenses will increase in future periods as we increase our efforts to sell our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that general and administrative expenses will be higher in 2005 compared to 2004 as we continue to implement internal controls over financial reporting relating to
compliance with the Sarbanes-Oxley Act of 2002;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that our interest income will continue to decrease due to decreasing cash balances;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our expectation that the losses of our Israeli subsidiaries will offset certain future earnings of the subsidiaries, if attained, during tax exemption periods (provided under
Israeli law);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that our ability to continue as a going concern will depend on our ability to raise additional capital or attain profitable operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that failure to secure additional capital or expand our revenue base would likely result in depleting our available funds and not being able to pay our obligations when
they become due;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that during the next 12 months we will need to raise additional capital to execute our business plan and to provide adequate working capital to satisfy our business
objections and requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that if we raise additional funds through the issuance of equity or convertible debt securities, we may be required to do so at a price per share below then-current
trading prices thereby diluting our current stockholders;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that we may not be able to obtain additional funds on acceptable terms, or at all; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | our expectation that certain levels of our purchase obligations may become payable to our suppliers at various times through 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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You can identify these and other forward-looking statements by the use of words such as may,
will, should, intend, expect, plan, estimate, project, anticipate, believe, potential, continue, or the negative of
such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our actual results to differ materially from the results expressed or implied by such forward-looking statements include those
set forth under the heading Risk Factors in this document and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this
document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.



Risk Factors



Our business is subject to substantial risks, including the risks described below.



We will need to raise additional capital in the future, and if we are unable to timely secure adequate funds on terms acceptable to us,
we may not be able to execute our business plan or to continue as a going concern.



During the next 12 months, we will need to raise additional capital to execute our business plan and to provide adequate working capital to satisfy our business objectives and requirements. If we raise additional
funds through the issuance of equity or convertible debt securities, we may be required to do so at a price per share below then-current trading prices thereby diluting our current stockholders. We may not be able to obtain additional funds on
acceptable terms, or at all. This potential inability to raise funds on acceptable terms could seriously harm our business. If we cannot raise needed funds on acceptable terms, we may not be able to execute our business plan or to continue as a
going concern.



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



We have
incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. We incurred losses of $15.0 million in the first six months of 2005 and $21.1 million in the year ended December 31, 2004. As of
June 30, 2005, our accumulated deficit was $211.4 million. In addition, we have increased our sales and marketing expenditures and research and development expenditures in connection with our efforts to develop new sources of revenue. Our revenues
and gross margins may not grow or even continue at their current level and may decline even further. If our revenues do not rapidly increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.



If our cash and cash equivalents fall below $20.0 million on December 31,
2005 or on June 30, 2006, the Contingent Note will be accelerated and will be due three months after acceleration.



We provided the Contingent Note in the principal amount of $6.5 million payable on March 31, 2007. In the event that our consolidated revenues in the year
ended December 31, 2006 equal or exceed $60.0 million and our consolidated gross margin equals or exceeds 35% during the same period, the Contingent Note shall be canceled. The Contingent Note is subject to acceleration in the event that the excess
sum of our cash, cash equivalents, short-term investments and accounts receivables, net of the sum of our long-term and short-term liabilities (exclusive of the Contingent Note) is less than $20.0 million on December 31, 2005 or on June 30, 2006.



If we fail to achieve significant market penetration and customer
acceptance of our products, our prospects would be substantially harmed.



The market for broadband products in the cable television industry is extremely competitive, subject to drastic technological changes and highly fragmented. Our products in the Cable segment are new and relatively
unknown; accordingly, we have not generated significant revenue in this segment. To date, we have only begun to install Xtend products with customers in field trials. There can be no assurance that our initial installations of Xtend products will be
successful. As a development stage company, Xtend may face challenges such as market resistance to a new product, perceptions regarding customer support and quality control.



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



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



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



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



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



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



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



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



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



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



If our inventories exceed anticipated sales or selling prices, we may be required to write-down our inventory, which would adversely affect our operating results.



We are required to order or build inventory well in advance of the time of
our anticipated sales. In this regard, our inventory increased substantially in 2004 because sales were substantially less than our anticipated demand. In the event that our sales do not increase, the sales price of our products decreases or we are
otherwise unable to control inventory levels consistent with actual demand, we may be required to write-down a substantial portion of our inventory, as we did in 2001. Such a write-down would adversely affect both our balance sheet and operating
results in future periods.



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



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



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



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



We acquired Xtend, a provider of infrastructure solutions that expand the bandwidth of cable television lines, on June 30, 2004. We also continue to explore investments in or acquisitions of other companies, products
or technologies, including companies or technologies that are not complementary or related to our current wireless broadband access business. We may be unsuccessful in operating Xtend as a profitable business as we were unable to operate Shira as a
profitable business. In addition, we may have difficulty integrating Xtends or other companies personnel, operations, products and technologies into our current business. It also may be difficult to manage Xtend since a significant
number of its management is currently in Israel and in Atlanta, Georgia. These difficulties may disrupt our ongoing business, divert the time and attention of our management and employees and increase our expenses. Moreover, the anticipated benefits
of our acquisition of Xtend or any other acquisition may not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and
other identifiable intangible assets and the incurrence of large and immediate write-offs, any of which could seriously harm our business. In addition, we expect that we will expend significant resources in searching for and investigating new
business opportunities, and may be unsuccessful in acquiring new businesses.



We will need to develop distribution channels and management resources to market and sell our products.



We are at a development stage in the commercialization of Xtend products. We currently have strictly limited relationships with potential customers and
distributors as well as limited professional sales staff. We will be successful only if we are able to develop distribution channels to market and sell Xtend products.



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



We currently have limited exposure to global business opportunities. We will
not be able to take advantage of any meaningful potential global demand for our products unless and until we are able to develop global distribution channels and strategies.



We have not yet produced or deployed Xtend products in high volumes.



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



Because we have not yet deployed Xtend
products in high volume, there is significant technology risk associated with any such future deployment. We cannot be sure that any such high volume deployment would be successful.



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



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



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



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



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



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



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



| |  |  | overall demand for broadband services, particularly relatively new services such as VOIP;
| | - |  | -----------------------------------------------------------------------------------------



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



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



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



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



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



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



Our participation or lack of participation in industry standards groups may adversely affect our business.



We are not active in the standards process of the Cable Television
Laboratories, Inc., a cable industry consortium that establishes cable technology standards and administers compliance testing. In the future, we may determine to join or not join other standards or similar organizations. Our membership in these
organizations could dilute our proprietary intellectual property rights in our products while our failure to participate in others could jeopardize acceptance of any of our products that do not meet industry standards.



Product standardization, as may result from wireless industry initiatives or from
initiatives of the major cable operators, may adversely affect our prospects.



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



Since we have recently reduced our workforce, our research and development efforts could
be harmed.



We recently implemented a cost reduction
program by reducing our workforce. The full implementation of this program resulted in a reduction of our workforce of approximately 16% (when compared to the workforce levels as of June 30, 2005). This reduction will have the largest effect on our
research and development activities. Our ability to further develop and market our products may be limited if we have not accurately predicted the appropriate workforce requirements for our research and development efforts.



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



Sales outside of North America accounted for approximately 21% of our revenues in the second quarter of 2005. In addition, we maintain research and development facilities in Israel. Our reliance on international
sales, operations and suppliers exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | the extent and nature of regulatory attitudes toward such issues as competition between operators, access by third parties 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 net sales growth would be materially and adversely affected. Similarly, if our expectations regarding these and other trends are not met, our net sales could be materially and adversely affected.



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



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



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



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



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



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



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



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



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



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



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



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



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



A relatively small number of customers account for a large percentage of our revenues, as set forth in the table below:



|           |  |                            |   |  |                          |   |  |      |   |  |      |  
|---------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|           |  | Three Months endedJune 30, |   |  | Six Months endedJune 30, |  
|           |  | 2005                       |   |  | 2004                     |   |  | 2005 |   |  | 2004 |  
|Customer A |  | 66                         | % |  | 17                       | % |  | 50   | % |  | 15   | %
|Customer B |  | 13                         | % |  | 16                       | % |  | 10   | % |  | 15   | %
|Customer C |  | 2                          | % |  |                         |   |  | 10   | % |  |     |  
|Customer D |  |                           |   |  | 3                        | % |  | 2    | % |  | 17   | %
|Customer E |  |                           |   |  |                         |   |  | 9    | % |  | 10   | %
|Customer F |  |                           |   |  | 44                       | % |  |     |   |  | 28   | %
|Customer G |  |                           |   |  | 17                       | % |  |     |   |  | 9    | %



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



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



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



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



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



Our functional currency is the U.S. dollar. We generate substantially all of
our revenues in U.S. dollars, but we incur a substantial portion of our expenses, principally salaries and related personnel expenses related to research and development, in New Israeli Shekels, or NIS. As a result, we are exposed to the risk that
the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags behind inflation in Israel.



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



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



The potential effects of regulatory actions could impact spectrum allocation and
frequencies worldwide and cause delays or otherwise negatively impact the growth and development of the broadband market, which would adversely affect our business.



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



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



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



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



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



| |  |  | price;
| | - |  | ------



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



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



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



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



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



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



Certain of our competitors and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than we
have and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other developments. In addition, many of our competitors have longer operating histories, greater name recognition, broader product lines and
established relationships with system integrators and service providers. Our primary competitors are Alvarion Inc.; Aperto Networks, Inc.; NextNet Wireless, Inc.; IP Wireless, Inc.; Navini Networks, Inc.; Wi-LAN Inc.; SR Telecom Inc.; Harris
Corporation; Cambridge Wireless Limited; Flarion Technologies Inc.; VCom Inc.; Airspan Networks, Inc.; ZTE Corporation; Scientific-Atlanta, Inc.; Motorola, Inc.; C-Core and Narad Networks, Inc. Most of these competitors have existing relationships
with one or more of our prospective customers. For our broadband wireless offerings, we face competition from technologies such as digital subscriber line, fiber and cable. In the cable industry, our cable offerings face competition from
technologies such as digital set-top boxes, high-end compression technologies and DVRs. Furthermore, the move toward open standards may increase the number of operators who will offer new services, which in turn may increase the number of
competitors and drive down the capital expenditures per subscriber deployed. We may not be able to compete successfully against our current and future competitors, and competitive pressures could seriously harm our business.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Although we reduced the costs of
our wireless network operations in response to the decline in the telecommunications industry that began around 2001, we have increased certain expenses to address new business opportunities in both the Wireless Network and Cable segments and we
will need to continue to monitor closely our costs and expenses. If the market and our business do not expand, we may need to further reduce our operations.



Our acquisition of Xtend has caused our costs to increase as we seek to develop business. In addition, the acquisition agreement requires payment to
certain former Xtend stockholders as part of the purchase price, subject to various performance criteria.



We depend on Davidi Gilo, our Chairman of the Board and Chief Executive Officer, the loss of whom could seriously harm our business.



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



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



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



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



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



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



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



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



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



Any infringement claim or litigation against us could significantly harm our business, operating results and financial condition.



If we fail to adequately protect our intellectual property, we may not be able to compete
and our ability to provide unique products may be compromised.



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



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



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



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



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



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



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



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



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



The Sarbanes-Oxley Act of 2002 that became law in July 2002 and the resulting rules of the Nasdaq National Market have required and will continue to
require changes in our corporate governance, public disclosure and compliance practices. The number of rules and regulations applicable to us has increased and will continue to increase our legal and financial compliance costs. In addition, we have
incurred and will continue to incur significant costs as we prepare to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal control over financial reporting. These laws and regulations and perceived increased risk of
liability could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers. We cannot estimate the timing or magnitude of additional
costs we may incur as a result.



In addition to the increased
costs discussed above, we are spending an increased amount of management time and internal resources to understand and comply with these changing laws, regulations and standards relating to corporate governance and public disclosure. Allocating the
necessary resources to comply with evolving corporate governance and public disclosure standards has increased general and administrative expenses and caused a diversion of management time and attention to compliance activities.



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



Since our inception, we have used stock options as a fundamental component of our employee compensation packages. We believe that our stock option plans are an important tool to link the long-term interests of stockholders and employees,
especially executive management, and serve to motivate management to make decisions that will, in the long run, give the best returns to stockholders. FASB has adopted changes to the U.S. GAAP that require us to record a charge to earnings for
employee stock option grants, as well as other equity-based awards. The ultimate outcome of this requirement will most likely negatively impact our earnings and could affect our ability to raise capital on acceptable terms. In addition, new
regulations implemented by the Nasdaq National Market requiring stockholder approval for all stock option plans could make it more difficult for us to grant stock options to employees in the future. To the extent that new regulations make it more
difficult or expensive to grant stock options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and
adversely affect our business.



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



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



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



As of April 1, 2005, the government of Israel has eliminated the ability of
companies to submit new applications for approved enterprise status. This change in the government policy may hinder us in the future with respect to any benefits we may have received for new undertakings which would have been entitled to
approved enterprise status.



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



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



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



As of June 30, 2005, our management collectively owned approximately
35.2% of our outstanding common stock (based on the number of shares owned by these individuals and the number of shares issuable upon exercise of options within 60 days of June 30, 2005). This percentage includes shares owned by Michael Corwin, our
President and Chief Operating Officer, who took a leave of absence beginning May 13, 2005 for a period of up to nine months.



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As a result, these stockholders, acting together, will be able to control the outcome of all matters
submitted for stockholder action, including:



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

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

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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Our Fourth Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws contain anti-takeover provisions that could make it more difficult for a third party to acquire control of us, even if that change in control would be beneficial to stockholders. Specifically:



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



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



| |  |  | super-majority voting is required to amend key provisions of our Fourth Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



It may be difficult to enforce a
judgment in the United States against us and our nonresident Chief Financial Officer and certain directors.



Our Chief Financial Officer and two of our directors are not residents of the United States, and a substantial portion of our assets and the assets of
these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States based upon the civil or criminal liabilities provisions of the United States federal securities laws against us
or any of those persons or to effect service of process upon these persons in the United States.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



As of June 30, 2005, we had cash, cash equivalents and short-term investments of $27.3 million. Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds
that invest in corporate and government fixed income securities that are subject to interest rate risk. We place our investments with high credit quality issuers and by policy limit the amount of the credit exposure to any one issuer.



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



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



Quantitative Interest Rate Disclosure as of June 30, 2005



If market interest rates were to increase on June 30, 2005 immediately and uniformly by 10%, the fair value of the portfolio would decline by approximately $24,000, or approximately 0.11% of the total portfolio
(approximately 0.11% of total assets). Assuming that the average yield to maturity on our portfolio at June 30, 2005 remains constant throughout the third quarter of 2005 and assuming that our cash, cash equivalents and short-term investments
balances at June 30, 2005 remain constant for the duration of the third quarter of 2005, interest income for the third quarter of 2005 would be approximately $118,000. Assuming a decline of 10% in the market interest rates at June 30, 2005, interest
income for the third quarter of 2005 would be approximately $104,000 which represents a decrease in interest income of approximately $7,000. The decrease in interest income will result in a decrease of the same amount to net income and cash flows
from operating activities for the three and six months ended June 30, 2005. These amounts are determined by considering the impact of the hypothetical interest rates on our cash equivalents and available-for-sale securities at June 30, 2005 over the
remaining contractual lives.





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Item 4. Controls and Procedures



Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of
such period, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange commission rules and forms.



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



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



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



From April 3, 2000 through June 30, 2005, we used net offering
proceeds as follows: approximately $7.9 million for purchases of property, plant and equipment, approximately $2.4 million for repayment of short term debt obligations, approximately $11.4 million for repurchase of our common stock, approximately
$1.6 million in connection with the Xtend Transaction and approximately $81.4 million for working capital.



On September 19, 2000, we completed an underwritten public offering of our common stock. The shares of common stock sold in the offering were registered
under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-45132). The Registration Statement was declared effective by the SEC on September 13, 2000. The public offering price was $94.688 per share for an aggregate public
offering price of the shares we sold of $55.2 million. After deducting underwriting discounts and commissions of $2.9 million and offering expenses of approximately $1 million, net proceeds to us from the offering were approximately $51.3 million.



From September 13, 2000 through June 30, 2005, we used
approximately $3.6 million of the net offering proceeds for purchases of property, plant and equipment and the acquisition of Xtend and approximately $21.9 million of the net offering proceeds for working capital.



Our temporary investments of the net proceeds from both of the offerings have
been in cash, cash equivalents and investment grade, short-term interest bearing securities.



Item 3. Defaults Upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



Item 6. Exhibits



|              |  |                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                     
|3.1           |  | Fourth 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, 2005, and incorporated herein by
reference.
|              | 
|3.2           |  | Amended and Restated Bylaws. Previously filed as an exhibit to our Registration Statement on Form S-1 (File No. 333-96129), and incorporated herein by reference.                                       
|              | 
|4.1           |  | Reference is made to Exhibits 3.1 and 3.2 above.                                                                                                                                                        
|              | 
|10.1          |  | Letter agreement between Vyyo Inc. and Michael Corwin, dated May 13, 2005. Previously filed as an exhibit to our Current Report on Form 8-K filed on May 18, 2005, and incorporated herein by
reference.
|              | 
|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



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



Date: August 12, 2005



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



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                 
|3.1           |  | Fourth 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, 2005, and incorporated herein by
reference.
|              | 
|3.2           |  | Amended and Restated Bylaws. Previously filed as an exhibit to our Registration Statement on Form S-1 (File No. 333-96129), and incorporated herein by reference.                                       
|              | 
|4.1           |  | Reference is made to Exhibits 3.1 and 3.2 above.                                                                                                                                                        
|              | 
|10.1          |  | Letter Agreement between Vyyo Inc. and Michael Corwin, dated May 13, 2005. Previously filed as an exhibit to our Current Report on Form 8-K filed on May 18, 2005, and incorporated herein by
reference.
|              | 
|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.                            



42