**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                 |
|------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                           |   |
| **x**                                                                                                                                          | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                     | ** ** |
| **For the Quarterly Period Ended December 31,  2007**                                                                                     |
| ** **                                                                                                                                     | ** ** |
| ** **                                                                                                                                     | **or** |
| ** **                                                                                                                                     | ** ** |
| **o**                                                                                                                                          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                     | ** ** |
| **For the transition period from                     to** |

 

**CommissionFile Number 000-30189**

 

**VYYO INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

| **6625  The Corners Parkway, Suite 100** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|
| **Norcross,  Georgia**                        | ** ** | **30092**  |
| (Address of  Principal Executive Offices)     |       | (Zip Code) |

 

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

 

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

 

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

 
|   | Large  accelerated filer o | Accelerated  filer o  |
|--------|---------------------------------|----------------------------|
|   |                            |                       |
|   | Non-accelerated  filer o   | Small  reporting company x |

 

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

Asof February 11, 2008, there were 18,693,512 shares of Common Stockoutstanding.

 

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**INDEX**

 

**VYYO INC.**

 
| ** **                                                                                                                              | **Page No.** |
|-----------------------------------------------------------------------------------------------------------------------------------------|-------------------|
| PART I.  FINANCIAL INFORMATION                                                                                                     | 1                 |
|                                                                                                                                    |              |
| Item 1.  Condensed Consolidated Financial Statements                                                                               | 1                 |
|                                                                                                                                    |              |
| Condensed  Consolidated Balance Sheets at December 31, 2007 and March 31, 2007                                                | 1                 |
|                                                                                                                                    |              |
| Condensed Consolidated  Statements of Operations for the Three and Nine Months Ended  December 31, 2007 and December 31, 2006 | 2                 |
|                                                                                                                                    |              |
| Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  December 31, 2007 and December 31, 2006           | 3                 |
|                                                                                                                                    |              |
| Notes to Condensed Consolidated Financial Statements                                                                                    | 4                 |
|                                                                                                                                    |              |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                | 20                |
|                                                                                                                                    |              |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                                                | 30                |
|                                                                                                                                    |              |
| Item 4.  Controls and Procedures                                                                                                   | 31                |
|                                                                                                                                    |              |
| PART II.  OTHER INFORMATION                                                                                                        | 31                |
|                                                                                                                                    |              |
| Item  1A. Risk Factors                                                                                                                  | 31                |
|                                                                                                                                    |              |
| Item 6.  Exhibits                                                                                                                  | 45                |
|                                                                                                                                    |              |
| SIGNATURES                                                                                                                              | 46                |

 

i

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**PART ****I. FINANCIAL INFORMATION**

**Item 1.****           ****CondensedConsolidated Financial Statements**

 

**Vyyo Inc.**

**ConsolidatedBalance Sheets**

**(In thousandsof U.S. $, except share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                   | ** ** | **December 31,  2007** | ** ** | **March 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** |
| **ASSETS**                                                                                                                                                                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** |
| **Current Assets:**                                                                                                                                                                                          | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Cash and cash equivalents                                                                                                                                                                                    |       | $                           | 10,185     |                     | $          | 24,134 |   |
| Short-term investments (December 31, 2007 includes $5,000 of  restricted cash)                                                                                                                          |       | 7,548                       |       | 7,020                    |       |
| Accounts receivable trade, net:                                                                                                                                                                              |       |                        |       |                     |       |
| Related party                                                                                                                                                                                                |       | 1,118                       |       | —                   |       |
| Other                                                                                                                                                                                                        |       | 396                         |       | 468                      |       |
|                                                                                                                                                                                                         |       | 1,514                       |       | 468                      |       |
| Inventory, net                                                                                                                                                                                               |       | 3,094                       |       | 2,320                    |       |
| Other                                                                                                                                                                                                        |       | 1,141                       |       | 923                      |       |
| **Total Current Assets**                                                                                                                                                                                     |       | 23,482                      |       | 34,865                   |       |
| **Long-Term Assets:**                                                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Restricted cash                                                                                                                                                                                              |       | —                      |       | 5,000                    |       |
| Property and equipment, net                                                                                                                                                                                  |       | 1,392                       |       | 1,662                    |       |
| Employee rights upon retirement funded                                                                                                                                                                       |       | 1,283                       |       | 1,221                    |       |
| Debt issuance costs, net                                                                                                                                                                                     |       | 127                         |       | 150                      |       |
| **TOTAL ASSETS**                                                                                                                                                                                             |       | $                           | 26,284     |                     | $          | 42,898 |   |
| ** **                                                                                                                                                                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** |
| **LIABILITIES AND CAPITAL  DEFICIENCY**                                                                                                                                                                      | ** ** | ** **                  | ** ** | ** **               | ** ** |
| **Current Liabilities:**                                                                                                                                                                                     | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Accounts payable                                                                                                                                                                                             |       | $                           | 1,975      |                     | $          | 1,349 |   |
| Accrued liabilities                                                                                                                                                                                          |       | 5,480                       |       | 8,140                    |       |
| Deferred revenues, related party                                                                                                                                                                             |       | 3,508                       |       | 3,679                    |       |
| Promissory note                                                                                                                                                                                              |       | 6,500                       |       | —                   |       |
| **Total Current Liabilities**                                                                                                                                                                                |       | 17,463                      |       | 13,168                   |       |
| ** **                                                                                                                                                                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** |
| **Long-Term Liabilities:**                                                                                                                                                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Promissory note                                                                                                                                                                                              |       | —                      |       | 5,401                    |       |
| Convertible note                                                                                                                                                                                             |       | 35,000                      |       | 35,000                   |       |
| Liability for employee rights upon retirement                                                                                                                                                                |       | 3,039                       |       | 2,345                    |       |
| **Total Liabilities**                                                                                                                                                                                        |       | 55,502                      |       | 55,914                   |       |
| **Capital Deficiency:**                                                                                                                                                                                      | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized, none  issued                                                                                                                                 |       | —                      |       | —                   |       |
| Common stock, $0.0001 par value and paid in capital; 50,000,000  shares authorized, 18,659,720 and 18,316,231 shares issued and outstanding at  December 31, 2007 and March 31, 2007, respectively |       | 268,234                     |       | 262,600                  |       |
| Accumulated other comprehensive gain (loss)                                                                                                                                                                  |       | 42                          |       | (1                       | )          |
| Accumulated deficit                                                                                                                                                                                          |       | (297,494                    | )          | (275,615                 | )          |
| **Total Capital Deficiency**                                                                                                                                                                                 |       | (29,218                     | )          | (13,016                  | )          |
| **TOTAL LIABILITIES AND CAPITAL  DEFICIENCY**                                                                                                                                                                |       | $                           | 26,284     |                     | $          | 42,898 |   |

 

*The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.*

 

1

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**Vyyo Inc.**

**Condensed Consolidated Statementsof Operations**

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

**(Unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **REVENUES**                                  | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                   | 799        |                                               | $          | 413 |   | $ | 2,179 |   | $ | 710 |   |
| Revenues, related party                       |       | 1,526                                               |       | 1,343                                              |       | 4,399 |   | 4,921 |   |
| **Total Revenues**                            |       | 2,325                                               |       | 1,756                                              |       | 6,578 |   | 5,631 |   |
| **COST OF REVENUES**                          | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of products sold                         |       | 670                                                 |       | 354                                                |       | 2,129 |   | 539 |   |
| Cost of products sold, related party          |       | 1,321                                               |       | 1,085                                              |       | 3,853 |   | 3,761 |   |
| Write down of inventory                       |       | —                                              |       | 255                                                |       | 183 |   | 424 |   |
| Insurance reimbursement for damaged inventory |       | —                                              |       | (710                                               | )          | (101 | ) | (710 | ) |
| **Total Cost of Revenues**                    |       | 1,991                                               |       | 984                                                |       | 6,064 |   | 4,014 |   |
| **GROSS PROFIT**                              |       | 334                                                 |       | 772                                                |       | 514 |   | 1,617 |   |
| **OPERATING EXPENSES**                        | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development                      |       | 3,068                                               |       | 2,872                                              |       | 9,091 |   | 8,755 |   |
| Sales and marketing                           |       | 2,191                                               |       | 1,967                                              |       | 7,266 |   | 6,618 |   |
| General and administrative, net               |       | 2,856                                               |       | 1,790                                              |       | 7,505 |   | 5,  701 |   |
| **Total Operating Expenses**                  |       | 8,115                                               |       | 6,629                                              |       | 23,862 |   | 21,074 |   |
| **OPERATING LOSS**                            |       | (7,781                                              | )          | (5,857                                             | )          | (23,348 | ) | (19,457 | ) |
| **FINANCIAL INCOME**                          |       | 260                                                 |       | 322                                                |       | 869 |   | 1,059 |   |
| **FINANCIAL EXPENSES**                        |       | (889                                                | )          | (910                                               | )          | (2,502 | ) | (2,481 | ) |
| **LOSS BEFORE INCOME TAXES**                  |       | (8,410                                              | )          | (6,445                                             | )          | (24,981 | ) | (20,879 | ) |
| **INCOME TAXES**                              |       | (69                                                 | )          | (88                                                | )          | 3,102 |   | (645 | ) |
| **LOSS FROM CONTINUING OPERATIONS**           |       | (8,479                                              | )          | (6,533                                             | )          | (21,879 | ) | (21,524 | ) |
| **DISCONTINUED OPERATIONS**                   |       | —                                              |       | —                                             |       | — |   | 78 |   |
| **LOSS FOR THE PERIOD**                       |       | $                                                   | (8,479     | )                                                  | $          | (6,533 | ) | $ | (21,879 | ) | $ | (21,446 | ) |
| **LOSS PER SHARE**                            | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic and diluted:**                        | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                         |       | (0.46                                               | )          | (0.36                                              | )          | (1.18 | ) | (1.20 | ) |
|                                          |       | (0.46                                               | )          | (0.36                                              | )          | (1.18 | ) | (1.20 | ) |
| **WEIGHTED AVERAGE NUMBER OF  SHARES**        | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and diluted                             |       | 18,554                                              |       | 18,032                                             |       | 18,484 |   | 17,862 |   |

 

*The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.*

 

2

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**Vyyo Inc.**

**Condensed Consolidated Statementsof Cash Flows**

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

**(Unaudited)**

 
| ** **                                                                                                              | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Loss for the period                                                                                                     |       | $                                                  | (21,879    | ) | $ | (21,446 | ) |
| Adjustments to reconcile  loss to net cash used in operating activities:                                                |       |                                               |       |   |   |
| Income and expenses not involving cash flows:                                                                           |       |                                               |       |   |   |
| Depreciation and amortization                                                                                           |       | 621                                                |       | 621 |   |
| Accretion and amortization of financing instruments, net                                                                |       | 1,122                                              |       | 1,105 |   |
| Write down of inventories                                                                                               |       | 183                                                |       | 514 |   |
| Stock-based compensation, net                                                                                           |       | 4,018                                              |       | 3,421 |   |
| Capital gain on sales of property and equipment                                                                         |       | (6                                                 | )          | (29 | ) |
| Decrease (increase) in assets and liabilities:                                                                          |       |                                               |       |   |   |
| Accounts receivable, related party                                                                                      |       | (1,118                                             | )          | (991 | ) |
| Accounts receivable, other                                                                                              |       | 72                                                 |       | 510 |   |
| Other current assets                                                                                                    |       | (218                                               | )          | (32 | ) |
| Inventory                                                                                                               |       | (957                                               | )          | (1,372 | ) |
| Accounts payable                                                                                                        |       | 626                                                |       | 110 |   |
| Accrued liabilities                                                                                                     |       | (2,444                                             | )          | 866 |   |
| Deferred revenues, related party                                                                                        |       | (171                                               | )          | 3,738 |   |
| Liability for employee rights upon retirement                                                                           |       | 694                                                |       | 350 |   |
| Net cash used in operating  activities                                                                                  |       | (19,457                                            | )          | (12,635 | ) |
|                                                                                                                    |       |                                               |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchase of property and  equipment                                                                                     |       | (421                                               | )          | (348 | ) |
| Purchase of short-term  investments                                                                                     |       | (21,269                                            | )          | (28,048 | ) |
| Proceeds from sales and  maturities of short-term investments                                                           |       | 25,784                                             |       | 20,437 |   |
| Proceeds from sale of  property and equipment                                                                           |       | 10                                                 |       | 29 |   |
| Contributions to severance  pay funds                                                                                   |       | (62                                                | )          | (172 | ) |
| Net cash provided by (used  in) investing activities                                                                    |       | 4,042                                              |       | (8,102 | ) |
|                                                                                                                    |       |                                               |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Proceeds from exercise of  stock options                                                                                |       | 1,616                                              |       | 1,561 |   |
| Proceeds from issuance of common stock, Senior Secured Note, 2006  Convertible Note and warrants, net of issuance costs |       | —                                             |       | (417 | ) |
| Proceeds from issuance of  2007 Convertible Note, net of issuance costs                                                 |       | (150                                               | )          | — |   |
| Net cash provided by  financing activities                                                                              |       | 1,466                                              |       | 1,144 |   |
| Decrease in cash and cash  equivalents                                                                                  |       | (13,949                                            | )          | (19,593 | ) |
| Cash and cash equivalents  at beginning of period                                                                       |       | 24,134                                             |       | 27,009 |   |
| Cash and cash equivalents  at end of period                                                                             |       | $                                                  | 10,185     |   | $ | 7,416 |   |
|                                                                                                                    |       |                                               |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information:**                                                                  | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cash paid for taxes                                                                                                     |       | $                                                  | 12         |   | $ | 5 |   |
| Cash paid for interest                                                                                                  |       | $                                                  | 1,036      |   | $ | 1,037 |   |

 

*The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.*

 

3

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** **

**Vyyo Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements of Vyyo Inc. have been prepared in accordance withgenerally accepted accounting principles in the United States (“GAAP”) forinterim financial information and with the instructions to the Quarterly Reporton Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and notes required by GAAP for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals, reclassifications and adjustments) considerednecessary for a fair presentation have been included. Operating results for theinterim period are not necessarily indicative of the results that may beexpected for the full year. You should read these interim unaudited condensedconsolidated financial statements in conjunction with the audited consolidatedfinancial statements in the Annual Report on Form 10-K for the year ended December 31,2006, filed by Vyyo Inc. with the Securities and Exchange Commission (the “SEC”).

 

**Changein Fiscal Year End**

 

EffectiveDecember 3, 2007, the Company changed its fiscal year end from December 31to March 31. The Company’s new fiscal year will commence April 1,2008 and end on March 31, 2009.

 

**Liquidity, Capital Resources and Going Concern Considerations**

 

Theconsolidated financial statements of Vyyo Inc. and its wholly-ownedsubsidiaries (collectively, the “Company”) are presented on a going concernbasis, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company has experiencedsignificant losses and negative cash flows from operations since itsincorporation. For the nine months ended December 31, 2007, the Company incurreda net loss of $21,879,000 and had an accumulated deficit of $297,494,000. Thesematters raise substantial doubt about the Company’s ability to continue as agoing concern. The Company’s ability to continue as a going concern will dependupon its ability to raise additional capital during the next three months. TheCompany is pursuing raising additional capital to fund its operations althoughthere is no assurance that such capital will be available to the Company. TheCompany also is seeking to expand its revenue base by adding new customers andto further reduce expenses, including the restructuring plan discussed below in“—Costs Associated with Exit or Disposal Activities.” Failure to secureadditional capital in the very short term or to expand its revenue base in thelonger term will result in the Company depleting its available funds and notbeing able to pay its obligations when they become due. The accompanying condensedconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from the possibleinability of the Company to continue as a going concern.

 

**Costs Associated with Exit or Disposal Activities**

 

On January 30, 2008, the Company’s board ofdirectors approved, and on February 4, 2008, the Company announced, itsintent to simplify the Company’s structure by streamlining its corporateorganization and reducing operating costs to better address market needs andrevenue opportunities in the cable industry.  As a result, the Companybegan implementing a restructuring plan and expects to record a restructuringcharge in the fourth fiscal quarter ended March 31, 2008 in the range of$5,000,000 to $7,000,000.  This charge will be utilized to cover severancepayments and other employee-related costs associated with the involuntarytermination of approximately 100 employees of approximately $3,000,000 to$4,000,000, the write-off of inventory of approximately $1,000,000 to$1,500,000 and the vacating of certain operating building leases in Israel andrelated ancillary costs of approximately $1,000,000 to $1,500,000. A significantportion of these costs were related to the Company’s continuing strategy tofocus on its Cable Solutions segment, to consolidate facilities in the UnitedStates and to significantly downsize its Wireless Solutions segment to supportcurrent customers only.  The CableSolutions segment and the Wireless Solutions segment are described below.

 

The workforce reduction and reduction of outsourcedservices and contractors impact all functions within the Company, both inIsrael and the United States, and include management and non-managementpositions.  The Company expects that all functions currently performed inIsrael will be moved to the United States by the quarter ended June 30,2008, and the Company is currently exploring its options to mitigate itsaffected real estate lease obligations in its facilities in 

 

4

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Israel. The Company also expects to record other costsrelated to the consolidation of the Company’s operations at its Georgiafacility, but at this time is unable to estimate the costs expected to beincurred and whether these costs will be material.

 

The Company expects to complete the restructuring planin the quarter ended June 30, 2008 and to reduce annual operating expensesby approximately $20,000,000, after payment of the severance costs describedabove.  These actions are consistent with the Company’s previousdisclosures concerning operating cost reductions and exit from the wirelessbusiness. Management continues to evaluate additional opportunities to reduceoperating costs.

 

On July 23, 2007, the Company implemented acost reduction program that reduced its workforce by approximately 16% (whencompared to the workforce levels as of June 30, 2007). The Companyrecorded approximately $400,000 in a one-time cash severance payment andrelated expenses. This cost reduction did not require the termination of anycontractual obligations or require the Company to incur other materialassociated costs.

 

**Financing**

 

                On March 28, 2007, the Companyclosed the private placement (the “2007 Financing”) of a convertible note withGoldman, Sachs & Co. in exchange for $35,000,000 (the “2007Convertible Note”), which included $17,500,000 of new funding and $17,500,000of which the Company used to pay off the $10,000,000 10% Convertible Note (the “2006Convertible Note”) and $7,500,000 9.5% Senior Secured Note (the “Senior SecuredNote”) issued to Goldman, Sachs & Co. in March 2006 as describedbelow. The 2007 Financing resulted in net proceeds to the Company ofapproximately $17,350,000. See note 7.

 

In March 2006, the Company closed the privateplacement (the “2006 Financing”) with Goldman, Sachs & Co. of$25,000,000 of common stock, the 2006 Convertible Note, the Senior Secured Noteand warrants to purchase common stock. The 2006 Financing resulted in netproceeds to the Company of approximately $23,400,000. See note 7.

 

**Organization and Principles of Consolidation**

 

The unaudited condensed consolidated financialstatements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries.All material inter-company balances and transactions have been eliminated inconsolidation.

 

The Company provides cable and wireless broadbandaccess solutions through two business segments: the “Cable Solutions” segmentand the “Wireless Solutions” segment. The Company’s primary focus is now on itsCable Solutions segment, and significantly all of its internal resources arefocused on enhancing its visibility in and penetration of the cable market.

 

The Company’s products are designed to address fourmarkets: Cable, Telecommunication, Utility and Wireless Internet ServiceProviders (“WISP”). Although the Company is engaged to various degrees in thesedistinct markets, some of the Company’s core technologies overlap with itssolutions.

 

The Company’s Cable Solutions segment includes theCompany’s UltraBandTM products that are designed to expand cable operators’typical hybrid-fiber coax (“HFC”) network capacity in the “last mile” by up totwo times in the downstream and up to four times in the upstream. Additionally,it includes products that deliver telephony and data T1/E1 links to enterpriseand cellular providers over cable’s HFC networks. The Cable Solutions segmentalso includes the results of operations of Xtend Networks Ltd., an Israelicompany, and its wholly-owned, United States-based subsidiary, XtendNetworks Inc. (collectively, “Xtend”).

 

 The Company’s Wireless Solutions segmentincludes products which enable utilities and other network service providers tooperate private wireless networks for communications, monitoring andSupervisory Control and Data Acquisition of their geographically disbursed,remote assets. Additionally, it includes the Company’s WISP andtelecommunications products which address the needs of rural service providersto serve customers with wireless high-speed data beyond the reach oftraditional terrestrial networks.

 

5

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**Summary of Significant Accounting Principles**

 

***Use of Estimatesin the Preparation of Financial Statements***

 

The preparation of financial statements in conformitywith GAAP requires management to make estimates, judgments and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.

 

On an on-going basis, management evaluates itsestimates, judgments and assumptions. Management bases its estimates, judgmentsand assumptions on historical experience and various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from these estimates, judgments and assumptions.

 

***Foreign CurrencyTransactions***

 

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

 

***Investments inMarketable Securities***

 

The Company’s investments in debt securities havebeen designated as available-for-sale. Available-for-sale securities arecarried at fair value, which is determined based upon the quoted market pricesof the securities, with unrealized gains and losses reported in the BalanceSheets as “Accumulated other comprehensive gain (loss),” a component of “CapitalDeficiency,” until realized. Realized gains and losses and declines in valuejudged to be other-than-temporary on available-for-sale securities are includedin the Statements of Operations as part of “Financial Income” or “FinancialExpenses,” as applicable. The Company views its available-for-sale portfolio asavailable for use in its current operations. Accordingly, the Company hasclassified all investments as short-term in the Balance Sheets under “Short-terminvestments,” even though the stated maturity date may be one year or more fromthe current balance sheet date. Interest, amortization of premiums, accretionof discounts and dividends on securities classified as available-for-sale arealso included in the Statements of Operations as part of “Financial Income” or “FinancialExpenses,” as applicable.

 

The Company recognizes an impairment charge when thedecline in the fair values of these investments below their cost basis isdeemed to be other-than-temporary. The Company considers various factors indetermining whether to recognize an impairment charge, including the length oftime and the extent to which the fair value has been below the cost basis, thecurrent financial condition of the investee and the Company’s intent andability to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value. The Company recognized noother-than-temporary impairment in its available-for-sale securities norrealized losses for either the three or nine months ended December 31, 2007. TheCompany recognized no other-than-temporary impairment in its available-for-salesecurities while recognizing realized losses of $11,000 for each of the threeand nine months ended December 31, 2006.

 

***Cash Equivalents***

 

Cash equivalents are short-term, highly-liquidinvestments and deposits that have original maturities of three months or lessat the time of investment and that are readily convertible to cash. As of December 31,2007, short-term investments included $5,000,000 of restricted cash as securityfor a letter of credit.

 

6

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***Inventory***

 

Inventory is stated at the lower of cost or market,where cost includes material and labor. The Company regularly monitorsinventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on the Company’s estimated forecast of future productdemand and production requirements. Although the Company makes every effort toensure the accuracy of its forecasts of future product demand, any significantunanticipated changes in demand or technological developments wouldsignificantly impact the value of the inventory and reported operating results.If actual market conditions are different than the Company’s assumptions,additional provisions may be required. The Company’s estimates of futureproduct demand may prove to be inaccurate, in which case the Company may haveunderstated or overstated the provision required for excess and obsoleteinventory. If the Company later determines that the inventory is overvalued,the Company would be required to recognize such costs in its cost of sales at thetime of such determination. If the Company later determines that the inventoryis undervalued, the Company may have overstated its cost of sales in previousperiods and would be required to recognize additional operating income onlywhen the undervalued inventory was sold. During the three and nine months endedDecember 31, 2007, theCompany recorded an inventory valuation write-down of approximately $0 and$183,000, respectively. During the three and nine months ended December 31, 2006, theCompany recorded an inventory valuation write-down of approximately $345,000and $514,000, respectively.

 

The Company adopted the provisions of the FinancialAccounting Standards Board (“FASB”) Statement No. 151, “Inventory Costs” (“FASB151”), as of January 1, 2006, which did not have a material effect on theCompany’s financial statements. Under FASB 151, the Company is required torecognize abnormal idle facility expenses as current-period charges, and toallocate fixed production overhead expenses to inventory based on normalcapacity of the production facility.

 

***Fair Value ofFinancial Instruments***

 

The fair value of financial instruments included inthe Company’s working capital approximates carrying value. The SyntekPromissory Note (described in note 4) and the 2007 Convertible Note deliveredin the 2007 Financing are presented in the Balance Sheets as “Long-TermLiabilities,” at approximately their estimated fair value.

 

***Debt IssuanceCosts***

 

Costs incurred in the issuance of the 2007Convertible Note in the 2007 Financing consisted of payments to legal advisorsin the year ended December 31, 2007. Costs incurred in the issuance of the2006 Convertible Note and Senior Secured Note included warrants to purchaseshares of the Company’s common stock issued to the Company’s financial advisorand cash payments made to legal and financial advisors in the year ended December 31,2006. In the year ended December 31, 2006, the Company determined the fairvalue of the warrants based on the Black-Scholes option-pricing model. Issuancecosts are deferred and amortized as a component of interest expense over theperiod from issuance through the first redemption date.

 

***Extinguishment ofDebt***

 

In the 2007 Financing, the Company repaid the 2006Convertible Note and Senior Secured Note. The Company accounted for thisrepayment as “extinguishment of debt” under Emerging Issues Task Force (“EITF”)96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”(“EITF 96-19”). The Company initially recorded the 2007 Convertible Note at itsestimated fair value, and used that amount to determine the debt extinguishmentloss of $3,263,000 resulting from recognition of $2,231,000 in unamortizedaccretion and $1,032,000 in unamortized issuance expenses related to the 2006 ConvertibleNote and Senior Secured Note.

 

***Property andEquipment***

 

Property and equipment are stated at cost lessaccumulated depreciation and amortization. Depreciation and amortization areprovided using the straight-line method over the estimated useful lives of theassets.

 

Leasehold improvements are amortized over theshorter of the lease term or the estimated useful life of the related asset.

 

7

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***Impairment of Long-Lived Assets***

 

Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”(“SFAS 144”), requires that long-lived assets, including definite lifeintangible assets to be held and used or disposed of by an entity, be reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. Under SFAS 144, if thesum of the expected future cash flows (undiscounted and without interestcharges) of the long-lived assets is less than the carrying amount, the Companywould recognize an impairment loss and would write down the assets to theirestimated fair values.

 

***Revenue Recognition***

 

The Company generates revenues from sales of itsproducts. As of December 31, 2007, the Company’srevenues from services were not significant. The Company’s products areoff-the-shelf products, sold “as is,” without further adjustment orinstallation. When establishing a relationship with a new customer, the Companyalso may sell these products together as a package, in which case the Companytypically ships products at the same time to the customer.

 

 The Company records revenues from sales ofproducts when (a) persuasive evidence of an arrangement exists; (b) deliveryhas occurred and customer acceptance requirements have been met, if any, andthe Company has no additional obligations; (c) the price is fixed ordeterminable; and (d) collection of payment is reasonably assured. TheCompany’s standard sales terms generally do not include customer acceptanceprovisions. However, if there is a right of return, customer acceptanceprovision or there is uncertainty about customer acceptance, the Company defersthe associated revenue until it has evidence of customer acceptance.

 

EITF No. 00-21, “Revenue Arrangements withMultiple Deliverables” (“EITF 00-21”), addresses when and how an arrangementinvolving multiple deliverables should be divided into separate units ofaccounting. The Company’s multiple deliverables arrangements are thosearrangements with new customers in which the Company sells its productstogether as a package. Because the Company delivers these off-the-shelfproducts at the same time and the four revenue recognition criteria discussedabove are met at that time, the adoption of EITF 00-21 had no impact on theCompany’s financial position or results of operations.

 

The Company recognizes revenues related to theexclusivity provisions contained in the equipment purchase agreement withArcadian Networks, Inc. described in note 3 on a straight line basis, overthe 10-year term of that agreement.

 

***Product Warranty***

 

The Company provides for product warranty costs whenit recognizes revenue from sales of its products. The Company calculates theprovision as a percentage of sales, based on historical experience.

 

***Research andDevelopment Costs***

 

Research and development costs are expensed asincurred and consist primarily of personnel, facilities, equipment and suppliesfor research and development activities. Grants received by the Company’s Israelisubsidiaries from the Office of the Chief Scientist at the Ministry of Industryand Trade in Israel and other research foundations are deducted from researchand development expenses as the related costs are incurred or as the relatedmilestone is met.

 

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

 

Basic and diluted loss per share are calculated andpresented in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”),for all periods presented. All outstanding stock options and shares ofrestricted stock have been excluded from the calculation of the diluted lossper share because these securities are not dilutive for the presented periods.For the nine months ended December 31, 2007, the total number of shares of common stockrelated to outstanding options, the 2007 Convertible Note, warrants issued inconnection with the 2006 Financing and restricted stock excluded from thecalculations of diluted loss per share was 10,661,084. For the nine monthsended December 31, 2006, thetotal number of shares of common stock related to outstanding options, the 2006Convertible Note, warrants issued in connection with the 2006 Financing andrestricted stock excluded from the calculations of diluted loss per share was7,065,013.

 

8

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***Stock-Based Compensation***

 

Prior to January 1, 2006, the Company accountedfor employees’ stock-based compensation under the intrinsic value model inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and related interpretations.

 

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

 

InMarch 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB107”). SAB 107 provides supplemental implementation guidance onSFAS 123(R), including guidance on valuation methods, inventorycapitalization of stock-based compensation cost, income statement effects,disclosures and other issues. SAB 107 requires stock-based compensation to beclassified in the same expense line items as cash compensation. The Company hasapplied the provisions of SAB 107 in its adoption of SFAS 123(R). Inaddition, the Company has reclassified stock-based compensation from priorperiods to correspond to current period presentation within the same operatingexpense line items as cash compensation paid to employees.

 

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

 

TheCompany adopted the modified prospective transition method permitted bySFAS 123(R). Under this transition method, the Company implementedSFAS 123(R) as of the first quarter of 2006 with no restatement ofprior periods. The valuation provisions of SFAS 123(R) apply to newawards and to awards modified, repurchased or cancelled after January 1,2006. Additionally, the Company recognizes compensation cost over the remainingservice period for the portion of awards for which the requisite service hasnot been rendered using the grant-date fair value of those awards as calculatedfor pro forma disclosure purposes under SFAS 123.

 

InNovember 2005, FASB issued Staff Position No. SFAS 123(R)-3 “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards.”The Company adopted the alternative transition method provided therein forcalculating the tax effects of stock-based compensation pursuant toSFAS 123(R). The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in capital poolrelated to the tax effects of employee stock-based compensation, which isavailable to absorb tax deficiencies recognized after adoption ofSFAS 123(R). As of January 1, 2006, the cumulative effect of theCompany’s adoption of SFAS 123(R) was not material.

 

The Company accountsfor equityinstruments issued to third party service providers (non-employees)in accordance with the fair value of the instrumentsbased on an option-pricing model, pursuantto the guidancein EITF 96-18 “Accounting for Equity Instruments ThatAre Issued toOther Than Employees for Acquiring, or in Conjunction withSelling Goodsor Services.” The Company revalues the fair value of the options granted overthe related service periods and recognizes the value over the vesting periodusing the Black-Scholes model.

 

The fair value of each stock option granted duringthe three and nine months ended December 31, 2007 and 2006

 

9

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wasestimated at the date of grant using the Black-Scholes and the binomialvaluation models, using the following assumptions:

 
| ** **                             | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Black-Scholes model  assumptions:      |       |                                                |       |                                               |       |   |   |   |   |
| Risk-free interest rates  ranges       |       | 3.41%-4.48                                          | %          | 4.98%-5.02                                         | %          | 3.41%-5.03 | % | 4.90%-5.25 | % |
| Weighted-average expected  life range  |       | 4.36-9.39                                           |       | 0.25-0.42                                          |       | 4.36-9.99 |   | 0.25-0.92 |   |
| Volatility ranges                      |       | 0.68-0.86                                           |       | 0.56-0.59                                          |       | 0.63-0.86 |   | 0.56-0.64 |   |
| Dividend yields                        |       | —                                              |       | —                                             |       | — |   | — |   |
|                                   |       |                                                |       |                                               |       |   |   |   |   |
| Binomial valuation model  assumptions: |       |                                                |       |                                               |       |   |   |   |   |
| Risk-free interest rates  ranges       |       | 3.30%-4.70                                          | %          | 4.60%-5.16                                         | %          | 3.30%-5.10 | % | 4.60%-5.33 | % |
| Weighted-average expected  life range  |       | 3.08-6.42                                           |       | 3.60-6.48                                          |       | 0.56-7.52 |   | 1.88-6.48 |   |
| Volatility ranges                      |       | 0.32-0.86                                           |       | 0.51-0.61                                          |       | 0.26-0.99 |   | 0.41-0.63 |   |
| Dividend yields                        |       | —                                              |       | —                                             |       | — |   | — |   |

 

***Recent AccountingPronouncements***

 

In December 2007, FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”), which changes theaccounting for business combinations. Under SFAS 141(R), an acquirer will berequired to recognize all of the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions. SFAS141(R) will change the accounting treatment and disclosure for certainspecific items in a business combination. SFAS 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. SFAS 141(R) will impact the Company in the event of any futureacquisition.

 

In December 2007, FASB issued SFAS No. 160,“Non-controlling Interests in Consolidated Financial Statements—an amendment ofAccounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishesnew accounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effectivefor fiscal years beginning on or after December 15, 2008. The Company doesnot believe that SFAS 160 will have a material impact on its consolidatedfinancial statements.

 

In February 2007, FASB issued SFAS 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).SFAS 159 permits companies to choose to measure many financial assets andfinancial liabilities at fair value. Unrealized gains and losses on items forwhich the fair value option has been elected are reported in earnings. SFAS 159became effective for the Company beginning January 1, 2008. The Company iscurrently evaluating the impact that adoption of SFAS 159 will have on itsconsolidated financial statements.

 

In July 2006, FASB issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken, or expected to be taken,in a tax return. FIN 48 requires the affirmative evaluation that ismore-likely-than-not, based on the technical merits of a tax position, that anenterprise is entitled to economic benefits resulting from positions taken inincome tax returns. If a tax position does not meet the more-likely-than-notrecognition threshold, the benefit of that position is not recognized in thefinancial statements. FIN 48 also requires companies to disclose additionalquantitative and qualitative information in their financial statements aboutuncertain tax positions. The Company adopted FIN 48 on January 1, 2007,which did not have a material impact on its consolidated financial statements.

 

***Reclassifications***

 

Certain amounts in the 2006 financial statementshave been reclassified to conform to the 2007 presentation.

 

10

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

 

Inventory is comprised of the following:

 

| ** **      | ** ** | **December 31, 2007**                       | ** ** | **March 31, 2007** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(In thousands of U.S. $)** | ** ** |
| Raw materials   |       | $                                                | 112        |                    | $          | 421 |   |
| Work in process |       | 304                                              |       | 455                     |       |
| Finished goods  |       | 2,678                                            |       | 1,444                   |       |
|            |       | $                                                | 3,094      |                    | $          | 2,320 |   |

 

**3.****                                     ****Equipment Purchase Agreement with Arcadian Networks, Inc. (RelatedParty)**

 

On March 31, 2006, theCompany entered into an Equipment Purchase Agreement (the “ANI Agreement”) withArcadian Networks, Inc. (“ANI”). Davidi Gilo, the Company’s Chairman ofthe board of directors and former Chief Executive Officer, is also the Chairmanof the board of directors of ANI and the sole member of the limited liabilitycompany that is the general partner of a major stockholder of ANI. AvrahamFischer, a director of the Company, is co-chief executive officer and adirector of Clal Industries and Investments, Ltd., which invested$20,000,000 in ANI in August 2006. Goldman, Sachs & Co., a majorstockholder in the Company and holder of the 2007 Convertible Note, is astockholder of ANI.

 

Pursuant to the ANI Agreement, the Company sellscertain of its products and services to ANI over a 10-year term. The ANIAgreement fixes the product prices for the first two years, after which timeprices are subject to adjustment according to the amount of product purchasedby ANI compared to specified forecasted purchase amounts.

 

The ANI Agreement provided that the Company woulddistribute its products to ANI on an exclusive basis in the United States,Canada and the Gulf of Mexico to identified markets if: (a) ANI made twonon-refundable payments of $4,000,000 during each of the first two years of theANI Agreement; (b) ANI met specified annual minimum product purchaseamounts; and (c) ANI’s outstanding balances were below specified amounts.

 

The Company received an initial purchase order for$10,000,000 on March 31, 2006 (related to products to be purchased in thefirst year of the ANI Agreement) and the first exclusivity payment of$4,000,000 on April 3, 2006, which satisfied ANI’s requirements for exclusivityin the first year of the ANI Agreement. As of December 31, 2007, the Company had notreceived the second $4,000,000 exclusivity payment, and thus the exclusivityprovisions of the ANI Agreement are of no further effect and the Company maysell all of its products and services in all markets in all territories.

 

For the three and nine months ended December 31, 2007, theCompany recognized revenue of $1,526,000 and $4,399,000, respectively, underthe ANI Agreement, which included income related to the exclusivity payment of$100,000 and $300,000, respectively, and product maintenance of $100,000 and$244,000, respectively. For the three and nine months ended December 31, 2006, theCompany recognized revenue of $1,343,000 and $4,921,000, respectively, whichincluded income related to the exclusivity payment of $100,000 and $300,000,respectively, and product maintenance of $49,000 and $103,000, respectively.The Company will recognize the exclusivity payments from ANI over the 10-yearterm of the Purchase Agreement.

 

As of December 31, 2007, ANI’s outstandingaccounts receivable balance was $1,118,000, all of which was paid as of February 14,2008. The Company had deferred revenues from sales to ANI of $3,508,000.

 

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

 

On June 30, 2004, the Company acquired all ofthe outstanding shares of Xtend, an Israeli privately-held company that was adevelopment stage company at the time.As part of the purchase, the Company delivered a promissory note in theprincipal amount of $6,500,000 originally payable on March 31, 2007 (the “SyntekPromissory Note”). The Company accounted for the Syntek Promissory Note ascontingent consideration since it was payable only if the Company was unable tomeet certain key provisions. These key provisions were amended on December 16,2005 as follows:

 

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

 

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

 

·                                          the SyntekPromissory Note will be cancelled if:

 

(a)                                 the Company’s revenue (including that of all subsidiaries, except fornewly-acquired businesses) equals or exceeds $60,000,000 and gross marginequal or exceeds 35%, for the year ended December 31, 2007; or

 

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

 

(c)                                 all of the Remaining Shares are included in a successfully concludedsecondary offering (on Form S-3 or otherwise) at an offering price at orabove $18.00 per share in which the holder either (i) sells all of theRemaining Shares or (ii) is provided an opportunity to sell all of suchshares into such secondary offering and elects not to sell, provided that thesuccessfully concluded offering included no fewer than the number of RemainingShares; or

 

(d)                                the receipt by the holder of a bona fide offer for the purchase of allof the Remaining Shares at an average sales price at or above $18.00 per share.A “bona fide” offer means a fully-funded and unconditional offer for purchaseby a buyer who has provable and sufficient financial resources to purchase allof the Remaining Shares for cash within a commercially reasonable period oftime from the date of offer, not to exceed 30 days.

 

As security for the amended Syntek PromissoryNote, the Company delivered a $5,000,000 irrevocable letter of credit, anddeposited $5,000,000 with a bank and agreed to restrictions on withdrawal untilthe letter of credit is cancelled. The letter of credit will be cancelled if,for 45 consecutive trading days, all of the following conditions exist: (a) theweighted average trading price of the Company’s common stock is equal to orhigher than $18.00 per share; (b) the average daily trading volume of theCompany’s common stock is higher than 150,000 shares per day; and (c) theholder is lawfully able to sell publicly in one transaction or in a series oftransactions, during such 45 consecutive trading days, all of its shares of theCompany’s common stock without registration under the Securities Act of 1933,as amended.

 

The Company determined that, as of the time of theamendment of the Syntek Promissory Note in December 2005 and immediatelyprior to its amendment, the contingency had been resolved and therefore theCompany recorded $6,500,000 as additional consideration paid in the Xtendacquisition. This resulted in an increase to the intangible assets acquired.Following an impairment test performed on the intangible assets, the assetswere immediately impaired. In addition, the Company estimated the fair value ofthe amended Syntek Promissory Note at $3,967,000 and recorded this amount inthe Balance Sheets as a long-term liability under “Promissory note.”

 

TheCompany recorded $2,533,000, the difference between the value of the amendedSyntek Promissory Note and the original Syntek Promissory Note, as “GainResulting from Amendment to Promissory Note” in the Consolidated Statements ofOperations for the year ended December 31, 2005. In addition, the Companyconcluded that the contingent non-payment/cancellation feature that exists inthe amended Syntek Promissory Note met the criteria in paragraph 12 of SFAS133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”)and is considered an embedded derivative instrument.  Accordingly, thecontingent non-payment feature is subject to the accounting requirements ofSFAS 133 whereby the contingent non-payment feature will be recorded at fairvalue at each reporting period with the adjustment to its fair value recordedin the Statements of Operations as “Financial Expenses.” The Company haselected to present the embedded derivative on a combined basis with the amendedSyntek Promissory Note due to the legal right of offset between the twofeatures of the note. The Company recorded expenses of approximately $389,000 and$1,099,000 for the three and nine months ended December 31, 2007,respectively, and $304,000 and $858,000 for the three and nine months ended December 31,2006, respectively, resulting from the adjustment of the embedded derivative toits fair value.

 

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Asof December 31, 2007, the Company did not satisfy any cancellation featuredescribed and the amended Syntek Promissory Note of $6,500,000 was recorded inthe Balance Sheets as “Current Liabilities” and is due on March 31, 2008.The embedded derivative as of December 31, 2007 is valued at $0.

 

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

 

Accrued liabilities consist of the following:

 

| ** **                                         | ** ** | **December 31, 2007**                       | ** ** | **March 31, 2007** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Withholding tax*                                   |       | $                                                | 523        |                    | $          | 3,577 |   |
| Compensation and benefits                          |       | 2,244                                            |       | 2,185                   |       |
| Royalties                                          |       | 985                                              |       | 950                     |       |
| Professional fees                                  |       | 401                                              |       | 322                     |       |
| Deferred rent                                      |       | 327                                              |       | 361                     |       |
| Interest payable to  Goldman, Sachs & Co. |       | 292                                              |       | 14                      |       |
| Warranty**                                         |       | 159                                              |       | 57                      |       |
| Deferred revenues                                  |       | 50                                               |       | 70                      |       |
| Other                                              |       | 499                                              |       | 604                     |       |
|                                               |       | $                                                | 5,480      |                    | $          | 8,140 |   |

 

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*In June 2007, the Company signed an agreement with its Israeliwholly-owned subsidiary to restructure its intercompany debt, whereby$77,139,000 previously classified as an intercompany loan was replaced andconverted into a convertible capital note. The convertible capital note isconvertible into ordinary shares of the wholly-owned subsidiary. Additionally,$17,062,000 of accrued interest on the loan was forgiven. Following therestructuring of debt and after consultation with the Company’s tax advisorsand based on a ruling received from the Israeli tax authorities, managementconcluded that the likelihood of an exposure to withholding tax on the interestforgiven is now remote. As a result, the Company reversed its provisionfor withholding tax on the debt interest of $3,226,000 (at March 31,2007), which had been provided for as a liability in the Company’s financialstatements. The reversal of the provision was recorded as income under “IncomeTaxes” in the Statements of Operations for the nine months ended December 31, 2007.

 

**The changes in the warranty balances consist of the following:

 

| ** **                                     | ** ** | **Nine Months**                             | ** ** | **Three  Months**  | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **Ended**                                        | ** ** | **Ended**               | ** ** |
| ** **                                     | ** ** | **December 31, 2007**                       | ** ** | **March 31, 2007** | ** ** |
| ** **                                     | ** ** | **(In thousands of U.S. $)** | ** ** |
| Balance at beginning of  period                |       | $                                                | 57         |                    | $          | 66 |   |
| Usage of warranty                              |       | (19                                              | )          | —                  |       |
| Product warranty issued  for new sales         |       | 182                                              |       | 23                      |       |
| Changes in accrual of  warranty periods ending |       | (61                                              | )          | (32                     | )          |
| Balance at end of period                       |       | $                                                | 159        |                    | $          | 57 |   |

 

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

 

The amounts paid related to severance and severanceexpenses were

 
| ** **                         | ** ** | **Three Months**                            | ** ** | **Nine Months**             | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **Ended December 31,**                 | ** ** | **Ended December 31,** | ** ** |
| ** **                         | ** ** | **2007**                                         | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Amounts paid related to  severance |       | $                                                | 240        |                             | $          | 170 |   | $ | 857 |   | $ | 844 |   |
| Severance expenses                 |       | $                                                | 428        |                             | $          | 265 |   | $ | 1,392 |   | $ | 1,053 |   |

 

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

 

**2007 Financing**

 

On March 28, 2007, the Company issued the 2007Convertible Note ($35,000,000 principal; 5% annual interest), initiallyconvertible into 3,500,000 shares of the Company’s common stock to Goldman,Sachs & Co., of which $17,500,000 was used to pay off in full theCompany’s outstanding 2006 Convertible Note and Senior Secured Note deliveredin the 2006 Financing.

 

The 2007 Convertible Note is convertible at theholder’s option into shares of the Company’s common stock at a conversion priceof $10.00 per share, provided, that in no event may the holder own of recordmore than 14.8% of the outstanding shares of the Company’s common stock. In theevent of a Fundamental Transaction (as defined in the 2007 Convertible Note toinclude sales of the Company’s assets and certain business combinationtransactions,) the holder may, at its option, require the Company to redeem allor any portion of the 2007 Convertible Note at a price equal to 101% of theprincipal amount, plus all accrued and unpaid interest, if any, and, subject tospecified conditions, may be entitled to a cash “make-whole” premium,calculated in accordance with the terms of the 2007 Convertible Note.

 

Under the Amended and Restated Registration RightsAgreement executed in connection with the 2007 Convertible Note, the Company isrequired to file a registration statement on Form S-3 registering theresale of the shares issuable upon conversion of the 2007 Convertible Note foran initial two-year period, subject to extension under specified circumstances.

 

The Company accounted for the issuance of the 2007Convertible Note (and the resulting repayment of the 2006 Convertible Note andSenior Secured Note) as extinguishment of debt under EITF 96-19. As a result ofthe extinguishment of the 2006 Convertible Note and Senior Secured Note, theCompany recorded $3,263,000 in the Statements of Operations as “FinancialExpenses” consisting of $2,231,000 of unamortized accretion and $1,032,000 ofunamortized issuance expenses.

 

In accordance with the provisions of EITF 96-19, theCompany recorded the 2007 Convertible Note at its fair value, which isestimated at $35,000,000. The 2007 Financing resulted in estimated net proceedsto the Company of approximately $17,350,000, following pay off in full of the2006 Convertible Note and Senior Secured Note and payment of issuance expensesof approximately $150,000.

 

**2006 Financing**

 

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

 

The Company allocated the proceeds received in the2006 Financing to the different instruments based on the relative fair value ofeach instrument as follows:

 

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

 

The estimated issuance costs of the 2006 Financingwere approximately $1,993,000 including (a) a $1,210,000 payment andissuance of warrants to purchase 79,559 shares of the Company’s common stock,at exercise prices ranging from $0.10 to $10.00 (at an estimated fair value of$366,000), to the Company’s financial advisor and (b) approximately$417,000 for legal and other professional fees and costs. Of these estimatedissuance costs, $806,000 and $385,000 were allocated to the 2006 ConvertibleNote and the Senior Secured Note, respectively. These costs were amortizedbased on the 

 

14

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effectiveinterest amortization method through the five-year term until maturity of thenotes and recorded as interest expense, based on the effective interest methodof amortization. The issuance costs described above were allocated to thedifferent instruments based on their relative fair values.

 

As noted above, the Company repaid in full the 2006Convertible Note and Senior Secured Note with proceeds from the 2007 Financing,and the unamortized accretion and unamortized issuance expenses wereextinguished at that time.

 

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

 

**Common Stock Reserved for Issuance**

 

As of December 31, 2007, theCompany reserved approximately 915,115 shares of common stock for issuance uponexercise of stock options and issuance of shares of restricted stock reservedunder its stock-based compensation plans. These shares are available forissuance under the plans described below.

 

**Stock Option Plans**

 

The Company has the following stock option plans:the 1999 Employee and Consultant Equity Incentive Plan and the Fourth Amendedand Restated 2000 Employee and Consultant Equity Incentive Plan (the “2000 Plan”).The Company currently makes grants only from the 2000 Plan, which permits thegrant of incentive stock options (“ISOs”) to employees, nonstatutory stockoptions to employees, directors and consultants and stock options which complywith Israeli law if granted to persons who are subject to Israel income tax.The 2000 Plan also provides for the awards of restricted stock and stockbonuses.

 

ISOs must have an exercise price equal to the fairvalue of the common stock on the grant date as determined by the Company’sboard of directors. The period within which the option may be exercised isdetermined at the time of grant, but may not be longer than 10 years. Thenumber of shares reserved under the 2000 Plan is subject to automatic annualincreases on the first day of each fiscal year, equal to the lesser of1,500,000 shares or 10% of the number of outstanding shares on the last day ofthe immediately preceding year.

 

In March 2005, the Company granted certainexecutives 630,000 options to purchase shares of common stock for $7.50 to$10.50 per share. The options vest and become exercisable if the closing priceof the Company’s common stock is at or above specified prices for 10 tradingdays out of any 30 consecutive trading days, so long as the optionee remains anemployee of or consultant to the Company on the 10th day of the period. Theoptions expire five years after the grant date, or, if earlier, 90 days afterthe optionee is no longer an employee of or consultant to the Company. As of December 31, 2007, 135,000of these stock options were forfeited. For the three and nine months ended December 31, 2007 and2006, the Company recorded expenses of $120,000 and $358,000, respectively,related to these stock options.

 

In August 2005, the Company granted certainemployees options to purchase 145,000 shares of the Company’s common stock atan exercise price of $0.10 per share. The market price on the date of grant was$6.75, which resulted in deferred stock compensation of $964,000, of which$222,000 was amortized during the year ended December 31, 2005 under APB No. 25.

 

In March 2007, the Company granted its ViceChairman of the board of directors 250,000 options to purchase shares of commonstock for $6.31 per share. This grant was made to the Vice Chairman in hisindividual capacity as a consultant to the Company. The options vest and becomeexercisable in equal monthly installments over 48 months. These stockoptions may be accelerated upon the occurrence of specified events, includingcertain financing events, approval of the Company’s products in identifiedcable companies or upon a “Change of Control” (as defined in the relatedconsulting agreement). For the three and nine months ended December 31, 2007, theCompany recorded expenses of $88,000 and $454,000, respectively, related tothese stock options.

 

15

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**Grant of Stock Options to Davidi Gilo**

 

On February 10, 2006, the Company’sCompensation Committee approved the grant of stock options to Mr. Gilo,Chairman of the board of directors, to purchase 900,000 shares of the Company’scommon stock. At the time, Mr. Gilo also was Chief Executive Officer ofthe Company. These options vest as follows:

 

(a)                 300,000 sharesvested upon the closing of the 2006 Financing.

 

(b)                300,000 sharesvest at such time as the per share price of the Company’s common stock closesat or above $10.44 for a period of any 22 (consecutive or non-consecutive)trading days, so long as Mr. Gilo remains an employee of or consultant tothe Company on the 22nd day of such period.

 

(c)                 300,000 sharesvest at such time as the per share price of the Company’s common stock closesat or above$15.66 for a period of any 22 (consecutive or non-consecutive)trading days, so long as Mr. Gilo remains an employee of or consultant tothe Company on the 22nd day of such period.

 

The Company recorded stock-based compensationexpenses of $0 and $0 for the three and nine months ended December 31, 2006,respectively, related to the 300,000 options granted to Mr. Gilo thatvested upon the closing of the 2006 Financing. In connection with the 600,000stock options granted to Mr. Gilo which vest based on the closing price ofthe Company’s common stock, the Company recorded stock-based compensationexpenses of $58,000 and $173,000 in the three and nine months ended December 31, 2007,respectively, and $58,000 and $173,000 in the three and nine months ended December 31, 2006,respectively. The Company determined these stock-based compensation expensesusing the Monte Carlo valuation method.

 

**Restricted Stock**

 

Recipients of shares of restricted stock areentitled to cash dividends, if paid, and to vote their shares throughout therestricted period. The shares are valued at the market price on the grant date,and compensation is amortized ratably over the vesting period. The Company mustrecognize compensation expenses for shares of restricted stock subject todesignated performance criteria if the performance criteria are being attainedor it is probable that they will be attained.

 

A summary of stock option plans, shares ofrestricted stock and related information, under all of the Company’s equityincentive plans as of December 31, 2007 is asfollows (in thousands of U.S. $, except per share data):

 
| ** **                        | ** ** | **Options/Shares  available  for grants** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  fair value** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| Balance at April 1,  2007    |       | 728                                            |       | 6,616                   |       | $                                      | 5.46       |                              | —     |   |
| Authorized                        |       | 1,000                                          |       | —                  |       | —                                 |       | —                            |       |
| Granted*                          |       | (1,399                                         | )          | 1,399                   |       | $                                      | 6.64       |                              | $          | 2.65 |   |
| Exercised                         |       | —                                         |       | (270                    | )          | $                                      | 3.92       |                              | —     |   |
| Cancelled                         |       | 586                                            |       | (586                    | )          | $                                      | 5.90       |                              | —     |   |
| Balance at December 31, 2007 |       | 915                                            |       | 7,159                   |       | $                                      | 5.71       |                              |       |   |
|                                   |            |                                                |            |                         |            |                                        |            |                                   |            |  |  |

 

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* Includes 198,125 options granted to non-employeedirectors for the nine months ended December 31, 2007.

 

16

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The following table summarizes informationconcerning outstanding and exercisable options under stock option plans as of December 31, 2007:

 
| ** **                                  | ** ** | **Options outstanding** | ** ** | **Options exercisable**                             | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|
| **Range of exercise prices** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  remaining  contractual  life** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  price per  share** | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** | **(In years)**                                 | ** ** | **(In U.S. $)** | ** ** | **(In thousands)** | ** ** | **(In U.S. $)** | ** ** |
| Plans:                                      |       |                    |       |                                                |       |   |   |   |   |   |   |
| 0.10                                        |       | 93                      |       | 2.95                                                |       | $ | 0.10 |   | 77 |   | $ | 0.1 |   |
| 0.99                                        |       | 1                       |       | 0.95                                                |       | 0.99 |   | 1 |   | 0.99 |   |
| 2.27-3.40                                   |       | 509                     |       | 3.24                                                |       | 3.25 |   | 418 |   | 3.23 |   |
| 3.  92-5.86                                 |       | 2,853                   |       | 4.11                                                |       | 4.77 |   | 1,774 |   | 4.62 |   |
| 5.  99-8.43                                 |       | 3,607                   |       | 4.33                                                |       | 6.84 |   | 988 |   | 7.08 |   |
| 9.00-10.50                                  |       | 96                      |       | 0.16                                                |       | 9.73 |   | 16 |   | 9.60 |   |
|                                        |       | 7,159                   |       | 4.09                                                |       | $ | 5.71 |   | 3,274 |   | $ | 5.10 |   |

 

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

 

The components of comprehensive loss are as follows:

 
| ** **                                               | ** ** | **Three Months  Ended December 31,**        | ** ** | **Nine Months  Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                         | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(In thousands of U.S. $)** | ** ** |
| Loss                                                     |       | $                                                | (8,479     | )                                        | $          | (6,533 | ) | $ | (21,879 | ) | $ | (21,446 | ) |
| Unrealized gain (loss) on  available-for-sale securities |       | 27                                               |       | (1                                       | )          | 43 |   | (3 | ) |
| Comprehensive loss                                       |       | $                                                | (8,452     | )                                        | $          | (6,534 | ) | $ | (21,836 | ) | $ | (21,449 | ) |

 

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

 

The Company’s business is divided into two segments:“Cable Solutions” and “Wireless Solutions.”

 
| ** **                        | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                  | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands of U.S. $)**              | ** ** |
| Consolidated revenues  from:      |       |                                      |       |                                     |       |   |   |   |   |
| Cable Solutions                   |       | $                                         | 769        |                                     | $          | 349 |   | $ | 2,120 |   | $ | 621 |   |
| Wireless Solutions:               |       |                                      |       |                                     |       |   |   |   |   |
| Related party                     |       | 1,526                                     |       | 1,343                                    |       | 4,399 |   | 4,921 |   |
| Other                             |       | 30                                        |       | 64                                       |       | 59 |   | 89 |   |
|                              |       | 1,556                                     |       | 1,407                                    |       | 4,458 |   | 5,010 |   |
| Consolidated revenues             |       | $                                         | 2,325      |                                     | $          | 1,756 |   | $ | 6,578 |   | $ | 5,631 |   |
|                              |       |                                      |       |                                     |       |   |   |   |   |
| Operating loss:                   |       |                                      |       |                                     |       |   |   |   |   |
| Cable Solutions                   |       | (6,067                                    | )          | (5,476                                   | )          | (18,322 | ) | (12,696 | ) |
| Wireless Solutions                |       | (1,714                                    | )          | (381                                     | )          | (5,026 | ) | (6,761 | ) |
| Total consolidated operating loss |       | (7,781                                    | )          | (5,857                                   | )          | (23,348 | ) | (19,457 | ) |
|                              |       |                                      |       |                                     |       |   |   |   |   |
| Financial income                  |       | 260                                       |       | 322                                      |       | 869 |   | 1,059 |   |
| Financial expenses                |       | (889                                      | )          | (910                                     | )          | (2,502 | ) | (2,481 | ) |
| Income tax                        |       | (69                                       | )          | (88                                      | )          | 3,102 |   | (645 | ) |
| Loss from continuing operations   |       | $                                         | (8,479     | )                                        | $          | (6,533 | ) | $ | (21,879 | ) | $ | (21,524 | ) |

 

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The following provides information on the Company’sassets:

 
| ** **                                         | ** ** | **December 31, 2007**   | ** ** | **March 31, 2007** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **(In thousands of U.S. $)** | ** ** |
| Cash, cash equivalents and  short-term investments |       | $                            | 17,733     |                    | $          | 31,154 |   |
| Restricted cash                                    |       | —                       |       | 5,000                   |       |
| Debt issuance costs, net                           |       | 127                          |       | 150                     |       |
| Cable Solutions                                    |       | 4,527                        |       | 3,370                   |       |
| Wireless Solutions                                 |       | 3,897                        |       | 3,224                   |       |
|                                               |       | $                            | 26,284     |                    | $          | 42,898 |   |

 
| ** **                                         | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                  | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(In thousands of U.S. $)**              | ** ** |
| Expenditures for long-lived assets: |       |                                      |       |                                     |       |   |   |   |   |
| Cable Solutions                                    |       | $                                         | 160        |                                     | $          | 776 |   | $ | 307 |   | $ | 828 |   |
| Wireless Solutions                                 |       | —                                    |       | 10                                       |       | 51 |   | 79 |   |
|                                               |       | $                                         | 160        |                                     | $          | 786 |   | $ | 358 |   | $ | 907 |   |
| Depreciation expenses:                             |       |                                      |       |                                     |       |   |   |   |   |
| Cable Solutions                                    |       | $                                         | 181        |                                     | $          | 205 |   | $ | 472 |   | $ | 431 |   |
| Wireless Solutions                                 |       | 24                                        |       | —                                   |       | 149 |   | 190 |   |
|                                               |       | $                                         | 205        |                                     | $          | 205 |   | $ | 621 |   | $ | 621 |   |

 

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

 
| ** **                        | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                  | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands of U.S. $)**              | ** ** |
| Revenues from sales to customers: |       |                                      |       |                                     |       |   |   |   |   |
| Cable Solutions segment:          |       |                                      |       |                                     |       |   |   |   |   |
| North America                     |       | $                                         | 753        |                                     | $          | 384 |   | $ | 2,070 |   | $ | 656 |   |
| Rest of the world                 |       | 16                                        |       | —                                   |       | 50 |   | — |   |
|                              |       | $                                         | 769        |                                     | $          | 384 |   | $ | 2,120 |   | $ | 656 |   |
| Wireless Solutions  segment:      |       |                                      |       |                                     |       |   |   |   |   |
| North America, related party      |       | $                                         | 1,526      |                                     | $          | 1,343 |   | $ | 4,399 |   | $ | 4,921 |   |
| North America                     |       | —                                    |       | —                                   |       | — |   | 18 |   |
| Rest of the world                 |       | 30                                        |       | 29                                       |       | 59 |   | 36 |   |
|                              |       | $                                         | 1,556      |                                     | $          | 1,372 |   | $ | 4,458 |   | $ | 4,975 |   |
|                              |       |                                      |       |                                     |       |   |   |   |   |
|                              |       | $                                         | 2,325      |                                     | $          | 1,756 |   | $ | 6,578 |   | $ | 5,631 |   |

 
| ** **                    | ** ** | **December 31****, 2007** | ** ** | **March 31, 2007** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **(In thousands of U.S. $)**   | ** ** |
| Property and equipment,  net: |       |                           |       |                    |       |
| Israel                        |       | $                              | 854        |                    | $          | 1,020 |   |
| United States                 |       | 538                            |       | 642                     |       |
|                          |       | $                              | 1,392      |                    | $          | 1,662 |   |

 

Sales to major customers out of total revenues areas follows:

 
| ** **                | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2007**                                  | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A, related party |       | 66                                        | %          | 77                                       | %          | 67 | % | 87 | % |
| Customer B                |       | 32                                        | %          | 19                                       | %          | 31 | % | 11 | % |

 

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**11.****                              ****SubsequentEvents**

 

**Costs Associated with Exit or Disposal Activities**

 

See note 1.

 

**Notice of Delisting or Failure to satisfy a continuedListing Rule or Standard; Transfer of Listing.**

 

On January 29, 2008, the Company received noticefrom The Nasdaq Stock Market (“NASDAQ”)that for the last 10 consecutive trading days the market value of the Company’slisted securities had been below the minimum $50,000,000 requirement forcontinued inclusion on The Nasdaq Global Market under Marketplace Rule 4450(b)(1)(A). NASDAQ also informed the Company that it does not comply with Marketplace Rule 4450(b)(1)(B),which requires total assets and total revenue of $50,000,000 each for the mostrecently completed fiscal year or two of the last three most recently completedfiscal years.  Under The Nasdaq Global Market Continued ListingRequirements, the Company may maintain its listing qualifications withoutcomplying with the total assets and total revenue requirement if it is incompliance with the requirements of Nasdaq Marketplace Rule 4450(b)(1)(A) withrespect to the market value of its listed securities being at least$50,000,000.  The notice has no immediate effect on the listing of theCompany’s securities, and its common stock will continue to trade on The NasdaqGlobal Market.

 

Pursuant to Marketplace Rule 4450(e)(4), theCompany was provided 30 calendar days, or until February 28, 2008, toregain compliance. If, at any time before February 28, 2008, the marketvalue of Company’s listed securities is $50,000,000 or more for a minimum of 10consecutive business days, NASDAQ will determine if the Company complies withMarketplace Rule 4450(b)(1)(A). If compliance with the rule cannot bedemonstrated by February 28, 2008, the Company will have the right toappeal a staff determination to delist the Company’s securities and the Company’ssecurities will remain listed until completion of the appeal process.  Inaddition, if the Company satisfies the continued listing requirements for TheNasdaq Capital Market, the Company has the ability to apply to transfer itssecurities from The Nasdaq Global Market to The Nasdaq Capital Market.  Ifthe Company submits a transfer application by February 28, 2008, theinitiation of the delisting proceedings will be stayed pending NASDAQ’s reviewof the application.

 

The Company is presently considering a number ofalternatives to regain compliance with Nasdaq Marketplace Rule 4450(b)(1)(A) toremain listed on The Nasdaq Global Market.  If the Company does notresolve the listing deficiency, the Company may apply to transfer the listingof the Company’s common stock to The Nasdaq Capital Market.

 

**Departure of Principal Officers**

 

**Avner Kol**.  On January 30,2008, Avner Kol’s employment with the Company was terminated. Mr. Kolpreviously served as the Company’s Chief Operating Officer.  The Companywill enter into a separation agreement with Mr. Kol regarding the terms ofhis separation.

 

**DavidGilo**.  Effective as of February 1,2008, Mr. Gilo agreed to reduce his annual salary from $200,000 to $12,000in exchange for providing services to the Company for 20 hours perweek. The Company will enter into a revised employment agreement with Mr. Giloreflecting this change.

 

**Consulting Agreement with James A. Chiddix**

 

Effective as of February 1, 2008, the Company amended its ConsultingAgreement with James A. Chiddix, the Company’s Vice Chairman of the board ofdirectors.  Under the amended agreement, Mr. Chiddix’s consulting feewill be reduced from $15,000 to $7,500 per month in exchange for providingcertain services to the Company for an average 40 hours per month.

 

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

 

Youshould read this Management’s Discussion and Analysis of Financial Conditionand Results of Operations in conjunction with the condensed consolidatedfinancial statements and accompanying notes appearing elsewhere in thisQuarterly Report on Form 10-Q of Vyyo Inc. The matters addressed in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, with the exception of the historical information presented, containforward-looking statements involving risks and uncertainties. Actual resultscould differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth in Part II,Item 1A below and elsewhere in this report.

 

## **Overview**

##  

VyyoInc. and its wholly-owned subsidiaries (collectively, “we,” “us” or “our”)provide cable and wireless broadband access solutions through two businesssegments: our “Cable Solutions” segment and our “Wireless Solutions” segment.Our primary focus is on our Cable Solutions segment, and significantly all ofour internal resources are focused on enhancing our visibility in andpenetration of the cable market. The addition of James A. Chiddix as theVice Chairman of our board of directors, Wayne H. Davis as our ChiefExecutive Officer, David Feldman as our Chief Technology Officer and Robert K.Mills as our Chief Financial Officer, all with substantial cable industryexperience, validates our efforts and increases our visibility within the cableindustry.

 

Effective December 3,2007, we changed our fiscal year end from December 31 to March 31.Our new fiscal year will commence April 1, 2008 and end on March 31,2009.

 

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

 

OurCable Solutions segment includes our UltraBandTM products that are designed toexpand cable operators’ typical hybrid-fiber coax (“HFC”) network capacity inthe “last mile” by up to two times in the downstream and up to four times inthe upstream. Additionally, it includes products that deliver telephony anddata T1/E1 links to enterprise and cellular providers over cable’s HFCnetworks. Our Cable Solutions segment also includes the results of operationsof Xtend Networks Ltd., an Israeli company, and its wholly-owned, UnitedStates-based subsidiary, Xtend Networks Inc. (collectively, “Xtend”). Wepurchased all of the outstanding capital stock of Xtend on June 30, 2004and consolidated its operations with our operations beginning July 1,2004. For a discussion of our acquisition of Xtend, see note 7 of our 2006annual Consolidated Financial Statements.

 

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

 

Wehave experienced significant losses and negative cash flows from operationssince our incorporation. For the nine months ended December 31, 2007, we incurred a netloss of $21,879,000 and had an accumulated deficit of $297,494,000. Thesematters raise substantial doubt about our ability to continue as a goingconcern. Our ability to continue as a going concern will depend upon ourability to raise additional capital during the next three months. We arepursuing raising additional capital to fund our operations although there is noassurance that such capital will be available to us. We also are seeking toexpand our revenue base by adding new customers and to further reduce expenses,including the restructuring plan discussed below. Failure to secure additionalcapital in the very short term or to expand our revenue base in the longer termwill result in depleting our available funds and not being able to pay ourobligations when they become due. See “Liquidity, Capital Resources and GoingConcern Considerations.”

 

On January 30, 2008, our board of directorsapproved, and on February 4, 2008, we announced, our intent to simplifyour structure by streamlining our corporate organization and reducing operatingcosts to better address market needs and revenue opportunities in the cableindustry.  As a result, we began implementing a restructuring plan andexpect to record a restructuring charge in the fourth fiscal quarter ended March 31,2008 in the range of $5,000,000 to $7,000,000.  This 

 

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charge will be utilized to cover severance paymentsand other employee-related costs associated with the involuntary termination ofapproximately 100 employees of approximately $3,000,000 to $4,000,000, thewrite-off of inventory of approximately $1,000,000 to $1,500,000 and thevacating of certain operating building leases in Israel and related ancillarycosts of approximately $1,000,000 to $1,500,000. A significant portion of thesecosts were related to our continuing strategy to focus on our Cable Solutionssegment, to consolidate facilities in the United States and to significantlydownsize our Wireless Solutions segment to support current customers only.

 

The workforce reduction and reduction of outsourcedservices and contractors impact all company functions, both in Israel and theUnited States, and include management and non-management positions.  Weexpect that all functions currently performed in Israel will be moved to theUnited States by the quarter ended June 30, 2008, and we are currentlyexploring our options to mitigate our affected real estate lease obligations.We also expect to record other costs related to the consolidation of ouroperations at our Georgia facility, but at this time we are unable to estimatethe costs expected to be incurred and whether these costs will be material.

 

We expect to complete the restructuring plan in thequarter ended June 30, 2008 and to reduce annual operating expenses byapproximately $20,000,000, after payment of the severance costs describedabove.  These actions are consistent with our previous disclosuresconcerning operating cost reductions and exit from the wireless business. Wecontinue to evaluate additional opportunities to reduce operating costs.

 

On July 23, 2007, we implemented a costreduction program that reduced our workforce by approximately 16% (whencompared to the workforce levels as of June, 2007). We recorded approximately$400,000 in a one-time cash severance payment and related expenses. This costreduction did not require the termination of any contractual obligations orrequire us to incur other material associated costs.

 

OnMarch 28, 2007, we closed the private placement of a convertible note withGoldman, Sachs & Co. in exchange for $35,000,000 (the “2007Convertible Note”), which included $17,500,000 of new funding and $17,500,000of which we used to pay off the 2006 Convertible Note and Senior Secured Notedelivered in the 2006 Financing (all as described below). Our net proceeds fromthe 2007 Financing were approximately $17,350,000. See also note 7.

 

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

 

**Subsequent Events**

 

***Costs Associated with Exit orDisposal Activities***

 

See Overview above.

 

***Notice of Delisting or Failure to satisfy acontinued Listing Rule or Standard***

 

On January 29, 2008, we received notice fromThe Nasdaq Stock Market (“NASDAQ”) that for the last 10 consecutive tradingdays, the market value of the our listed securities has been below the minimum$50,000,000 requirement for continued inclusion on The Nasdaq Global Marketunder Marketplace Rule 4450(b)(1)(A). NASDAQ also informed us  that wedo not comply with Marketplace Rule 4450(b)(1)(B), which requires totalassets and total revenue of $50,000,000 each for the most recently completedfiscal year or two of the last three most recently completed fiscal years.  Under The Nasdaq Global Market Continued ListingRequirements, we may maintain our listing qualifications without complying withthe total assets and total revenue requirement if we are in compliance with therequirements of Nasdaq Marketplace Rule 4450(b)(1)(A) with respect tothe market value of its listed securities being at least $50,000,000.  The notice has no immediate effect on thelisting of our securities, and our common stock will continue to trade on TheNasdaq Global Market.

 

Pursuant to Marketplace Rule 4450(e)(4), wewere provided 30 calendar days, or until February 28, 2008, to regaincompliance. If, at any time before February 28, 2008, the market value oflisted securities of our common stock is 

 

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$50,000,000or more for a minimum of 10 consecutive business days, NASDAQ will determine ifwe comply with Marketplace Rule 4450(b)(1)(A). If compliance with the rule cannotbe demonstrated by February 28, 2008, we will have the right to appeal astaff determination to delist our securities and our securities will remainlisted until completion of the appeal process. In addition, if we satisfy the continued listing requirements for TheNasdaq Capital Market, we have the ability to apply to transfer our securitiesfrom The Nasdaq Global Market to The Nasdaq Capital Market.  If we submit a transfer application by February 28,2008, the initiation of the delisting proceedings will be stayed pending NASDAQ’sreview of the application.

 

We are presently considering a number ofalternatives to regain compliance with Nasdaq Marketplace Rule 4450(b)(1)(A) toremain listed on The Nasdaq Global Market. If we do not resolve the listing deficiency, we may apply to transferthe listing of our common stock to The Nasdaq Capital Market.

 

***Departure of Principal Officers***

 

**Avner Kol**.  On January 30,2008, Avner Kol’s employment with us was terminated. Mr. Kol previouslyserved as our Chief Operating Officer.  We will enter into a separationagreement with Mr. Kol regarding the terms of his separation.

 

**David Gilo**.  Effective asof February 1, 2008, Mr. Gilo agreed to reduce his annual salary from$200,000 to $12,000 in exchange for providing services to us for 20 hours perweek.  The Company will enter into a revised employment agreement with Mr. Giloreflecting this change.

 

***Consulting Agreement with James A. Chiddix***

 

Effective as of February 1, 2008, we amended our Consulting Agreementwith James A. Chiddix, our Vice Chairman of the board of directors.  Underthe amended agreement, Mr. Chiddix’s consulting fee will be reduced from$15,000 to $7,500 per month in exchange for providing certain services to theCompany for an average 40 hours per month.

 

**Critical Accounting Principles**

 

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

 

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

 

***Revenue Recognition***

 

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

 

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

 

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

 

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

 

***Inventory***

 

Weregularly monitor inventory quantities on hand and record a provision forexcess and obsolete inventory based primarily on our estimated forecast offuture product demand and production requirements. Although we make everyeffort to ensure the accuracy of our forecasts of future product demand, anysignificant unanticipated changes in demand or technological developments wouldsignificantly impact the value of our inventory and reported operating results.If actual market conditions are different than our assumptions, additionalprovisions may be required. Our estimate of future product demand may prove tobe inaccurate, in which case we may have understated or overstated theprovision required for excess and obsolete inventory. If we later determinethat our inventory is overvalued, we would be required to recognize such costsin our costs of sales at the time of such determination. If we later determinethat our inventory is undervalued, we may have overstated our costs of sales inprevious periods and would be required to recognize additional operating incomeonly when the undervalued inventory was sold. During the three and nine monthsended December 31, 2007, we recordedan inventory valuation write-down of approximately $0 and $183,000,respectively. During the three and nine months ended December 31, 2006, werecorded an inventory valuation write-down of approximately $345,000 and$514,000, respectively.

 

Weadopted the provisions of the Financial Accounting Standards Board (“FASB”)Statement No. 151, “Inventory Costs” (“FASB 151”), as of January 1,2006, which did not have a material effect on our financial statements. UnderFASB 151 we are required to recognize abnormal idle facility expenses ascurrent-period charges, and to allocate fixed production overhead expenses toinventory based on normal capacity of the production facility.

 

***Extinguishment of Debt***

 

Inthe 2007 Financing we repaid the 2006 Convertible Note and Senior Secured Note.We accounted for this repayment as “extinguishment of debt” under EmergingIssues Task Force 96-19, “Debtor’s Accounting for a Modification or Exchange ofDebt Instruments” (“EITF 96-19”). We initially recorded the 2007 ConvertibleNote at its estimated fair value, and we used that amount to determine the debtextinguishment loss of $3,263,000 resulting from recognition of $2,231,000 inunamortized accretion and $1,032,000 in unamortized issuance expenses relatedto the 2006 Convertible Note and Senior Secured Note.

 

***Fair Value of Financial Instruments***

 

Thefair value of the financial instruments included in our working capitalapproximates carrying value. The Syntek Promissory Note and the 2007Convertible Note delivered in the 2007 Financing are presented in the BalanceSheets as “Long-Term Liabilities,” at approximately their estimated fair value.

 

***Debt Issuance Costs***

 

Costsincurred in the issuance of the 2007 Convertible Note consisted of cashpayments to legal advisors in the year ended December 31, 2007. Costs incurred inthe issuance of the 2006 Convertible Note and the Senior Secured Note includedwarrants to purchase shares of our common stock issued to our financial advisorand cash payments made to legal and financial advisors in the year ended December 31,2006. In the year ended December 31, 2006, we determined the fair value ofthe warrants based on the Black-Scholes option-pricing model. Issuance costsare deferred and amortized as a component of interest expense over the periodfrom issuance through the first redemption date.

 

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***Stock-Based Compensation***

 

Priorto January 1, 2006, we accounted for employees’ stock-based compensationunder the intrinsic value model in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) andrelated interpretations.

 

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), “Share-based Payment” (“SFAS 123(R)”).SFAS 123(R) supersedes APB 25 and related interpretations and amendsSFAS No. 95, “Statement of Cash Flows.” SFAS 123(R) requiresthat awards classified as equity awards be accounted for using the grant-datefair value method. The fair value of stock options is determined based on thenumber of shares granted and the price of our common stock, and determinedbased on the Black-Scholes, Monte Carlo and the binomial option-pricing models,net of estimated forfeitures. We estimate forfeitures based on historicalexperience and anticipated future conditions. We use the Monte Carlo valuationmodel only for stock options granted to executives in 2005 and 2006 wherevesting is subject to specific stock price performance.

 

InMarch 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-BasedPayment” (“SAB 107”) which provides supplemental implementation guidance onSFAS 123(R), including guidance on valuation methods, inventorycapitalization of stock-based compensation cost, income statement effects,disclosures and other issues. SAB 107 requires stock-based compensation to beclassified in the same expense line items as cash compensation. We applied theprovisions of SAB 107 in our adoption of SFAS 123(R). In addition, we havereclassified stock-based compensation from prior periods to correspond tocurrent period presentation within the same operating expense line items ascash compensation paid to employees.

 

Werecognize compensation cost for options granted with service conditions thathave graded vesting schedules using the graded vesting attribution method.

 

Weadopted the modified prospective transition method permitted bySFAS 123(R). Under this transition method, we implemented SFAS 123(R) asof the first quarter of 2006 with no restatement of prior periods. Thevaluation provisions of SFAS 123(R) apply to new awards and to awardsmodified, repurchased or cancelled after January 1, 2006. Additionally, werecognize compensation cost over the remaining service period for the portionof awards for which the requisite service has not been rendered using thegrant-date fair value of those awards as calculated for pro forma disclosurepurposes under SFAS 123.

 

InNovember 2005, FASB issued Staff Position No. SFAS 123(R)-3, “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards” (“SFAS123(R)-3”). We adopted the alternative transition method provided therein forcalculating the tax effects of stock-based compensation pursuant toSFAS 123(R). The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in capital poolrelated to the tax effects of employee stock-based compensation, which isavailable to absorb tax deficiencies recognized after adoption ofSFAS 123(R).  As of January 1,2006, the cumulative effect of our adoption of SFAS 123(R) was notmaterial.

 

Weaccountfor equity instrumentsissued to third party service providers (non-employees)in accordancewith the fair value based on an option-pricing model, pursuantto the guidance in EITF 96-18 “Accounting for EquityInstruments ThatAre Issued to Other ThanEmployees for Acquiring, or in Conjunction withSelling Goodsor Services.” We revalue the fair value of the options granted over the relatedservice periods and recognize the value over the vesting period, using theBlack-Scholes model.

 

Expenserelated to stock-based compensation is included in the following line items inthe Statements of Operations:

 
| ** **                 | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                  | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands of U.S. $)**              | ** ** |
| Cost of revenues           |       | $                                         | 17         |                                     | $          | 23 |   | $ | 49 |   | $ | 69 |   |
| Research and development   |       | $                                         | 142        |                                     | $          | 153 |   | $ | 461 |   | $ | 603 |   |
| Sales and marketing        |       | $                                         | 450        |                                     | $          | 343 |   | $ | 1,596 |   | $ | 1,074 |   |
| General and administrative |       | $                                         | 532        |                                     | $          | 635 |   | $ | 1,913 |   | $ | 1,675 |   |

 

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**RecentAccounting Pronouncements**

 

In December 2007, FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”), which changes theaccounting for business combinations. Under SFAS 141(R), an acquirer will berequired to recognize all of the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions. SFAS141(R) will change the accounting treatment and disclosure for certainspecific items in a business combination. SFAS 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. SFAS 141(R) will impact us in the event of any future acquisition.

 

 In December 2007, FASB issued SFAS No. 160,“Non-controlling Interests in Consolidated Financial Statements—an amendment ofAccounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishesnew accounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effectivefor fiscal years beginning on or after December 15, 2008. We do notbelieve that SFAS 160 will have a material impact on our consolidated financialstatements.

 

InFebruary 2007, FASB issued SFAS 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS 159”). This standard permits companiesto choose to measure many financial assets and financial liabilities at fairvalue. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings. This statement became effective for usbeginning January 1, 2008. We are currently evaluating the impact thatadoption of SFAS 159 will have on our consolidated financial statements.

 

InJuly 2006, FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return.FIN 48 requires the affirmative evaluation that is more-likely-than-not, basedon the technical merits of a tax position, that an enterprise is entitled toeconomic benefits resulting from positions taken in income tax returns. If atax position does not meet the more-likely-than-not recognition threshold, thebenefit of that position is not recognized in the financial statements. FIN 48also requires companies to disclose additional quantitative and qualitativeinformation in their financial statements about uncertain tax positions. Weadopted FIN 48 on January 1, 2007, which did not have a material impact onour consolidated financial statements.

 

## **Resultsof Operations**

##  

***Revenues***

 

Revenues increased to $2,325,000 in the three monthsended December 31, 2007 from $1,756,000 in the three months ended December 31,2006 and increased to $6,578,000 in the nine months ended December 31,2007 from $5,631,000 in the nine months ended December 31, 2006. Thisincrease in revenues for the three and nine months ended December 31, 2007compared to the same period in the prior year was primarily due to an increasein sales of our Cable Solutions products of $385,000 and $1,464,000,respectively. Revenues from our Wireless Solutions products increased by$184,000 for the three months ended December 31, 2007 compared to thethree months ended December 31, 2006 and decreased by $517,000 for thenine months ended December 31, 2007 compared to the nine months ended December 31,2006.

 

Revenue for the three and nine months ended December 31,2007 and 2006 did not include inventory previously written down to $0.

 

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

 

***Cost of Revenues***

 

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

 

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Cost of revenues increased to $1,991,000 during thethree months ended December 31, 2007 from $984,000 during the three monthsended December 31, 2006, and was $6,064,000 and $4,014,000 during the ninemonths ended December 31, 2007 and 2006, respectively. The increase incost of revenues for the three months ended December 31, 2007 wasprimarily due to increases in shipments of our products. For the three monthsand nine months ended December 31, 2007, we recorded a write-down ofinventory of $0 and $183,000, respectively, compared to a write-down ofinventory of $345,000 and $514,000 for the three and nine months ended December 31,2006, respectively. Our gross margins during the three and nine months ended December 31,2007 decreased primarily due to the decrease in shipments of our productstogether with flat fixed costs. We anticipate that our gross margins willcontinue to fluctuate based on our product and customer mix, revenue level andinventory valuations.

 

***Research and Development***

 

Our research and developmentexpenses were $3,068,000 and $2,872,000 during the three months ended December 31, 2007 and2006, respectively, and $9,091,000 and $8,755,000 during the nine months ended December 31, 2007 and2006, respectively. Of these expenses, the Cable Solutions segment accountedfor approximately $2,373,000 and $2,261,000 during the three months ended December 31, 2007 and2006, respectively, and $6,753,000 and $5,567,000 during the nine months ended December 31, 2007 and2006, respectively. The Wireless Solutions segment accounted for theremaining expenses of approximately $695,000 and $611,000 during the threemonths ended December 31, 2007 and2006, respectively, and $2,338,000 and $3,188,000 during the nine months ended December 31, 2007 and2006, respectively. These expenses consisted primarily of personnel,facilities, equipment and supplies and were charged to operations as incurred.All of our research and development activities were conducted in our Israelifacility.

 

The increase in our researchand development expenses in our Cable Solutions segment during the three monthsended December 31, 2007 comparedto the same period in 2006 mainly resulted from increases in subcontractors,materials and other professional fees from $314,000 to $658,000 offset bydecreases in salaries, compensation and recruiting fees from $1,312,000 to$1,059,000.

 

The increase in our researchand development expenses in our Cable Solutions segment during the nine monthsended December 31, 2007 comparedto the same period in 2006 mainly resulted from increases in (a) salaries,compensation and recruiting fees from $2,805,000 to $3,421,000, (b) subcontractors,materials and other professional fees from $1,175,000 to $1,402,000, (c) travelexpenses from $89,000 to $139,000 and (d) overhead expenses from $625,000to $839,000.

 

The increase in our researchand development expenses in our Wireless Solutions segment during the threemonths ended December 31, 2007 comparedto the same period in 2006 resulted from increases in (a) salaries,compensation and recruiting fees from $359,000 to $386,000, (b) subcontractorsand materials from $49,000 to $87,000, and (c) non-cash expenses relatedto stock option grants from $15,000 to $30,000 during the three monthsended December 31, 2006 and2007, respectively.

 

The decrease in our researchand development expenses in our Wireless Solutions segment during the ninemonths ended December 31, 2007 comparedto the same period in 2006 resulted from decreases in (a) salaries,compensation and recruiting fees from $1,702,000 to $1,384,000 due to decreasedworkforce, (b) subcontractors and materials from $544,000 to $279,000, (c) non-cashexpenses related to stock option grants from $206,000 to $83,000 and (d) travelexpenses from $93,000 to $33,000.

 

We anticipate that ourresearch and development costs will decrease in the future due to ourrestructuring efforts and downsizing of our Wireless Solutions segment.

 

***Sales and Marketing***

 

Sales and marketing expenses increased to $2,191,000from $1,967,000 and increased to $7,266,000 from $6,618,000 during the threeand nine months ended December 31, 2007 and 2006, respectively. Sales andmarketing expenses consist of salaries and related costs for sales andmarketing employees, consulting fees and expenses for travel, trade shows,market research, branding and promotional activities.

 

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Sales and marketing expenses for our Cable Solutionssegment were approximately $2,012,000 and $6,879,000 during the three and ninemonths ended December 31, 2007, respectively, compared to $1586,000 and$5,068,000 for the three and nine months ended December 31, 2006,respectively.

 

The increase during the three months and nine monthsended December 31, 2007 compared to the same periods in 2006 resultedmainly from increases in (a) salaries, compensation and recruiting fees of$248,000 and $734,000 due to increased workforce, (b) non-cash expensesrelated to stock option grants of $123,000 and $506,000, (c) professionalfees of $63,000 and $30,000, and (d) marketing and miscellaneous expensesof $0 and $555,000, respectively.

 

Sales and marketing expenses for our WirelessSolutions segment were approximately $179,000 and $387,000 during the three andthe nine months ended December 31, 2007, respectively. For the three andthe nine months ended December 31, 2006, the sales and marketing expensesfor our Wireless Solutions segment were $381,000 and $1,550,000, respectively.The decrease in the expenses for our Wireless Solutions segment in the threeand nine months ended December 31, 2007 compared to the same periods in2006 resulted from a decrease in the sales and marketing workforce of ourWireless Solutions segment following the equipment agreement signed with ANIand our focus on our Cable Solutions segment. During the three months ended December 31,2006, we relocated our wireless sales and marketing department from Palo Alto,California to Norcross, Georgia, and decreased our workforce.

 

Given our reduction in workforce as a result of ourrestructuring efforts, we anticipate that our sales and marketing expenses willcontinue to decrease in future periods.

 

***General and Administrative***

 

General and administrative expenses were $2,856,000and $1,790,000 during the three months ended December 31, 2007 and 2006,respectively. Of these expenses, approximately $1,799,000 and $1,633,000 werefrom our Cable Solutions segment and approximately $1,057,000 and $157,000 werefrom our Wireless Solutions segment during the three months ended December 31,2007 and 2006, respectively.

 

For the nine months ended December 31, 2007 and2006, general and administrative expenses were $7,505,000 compared to$5,701,000, respectively. Of these expenses, approximately $4,935,000 and$2,363,000 were from our Cable Solutions segment and approximately $2,570,000and $3,338,000 were from our Wireless Solutions segment during the nine monthsended December 31, 2007 and 2006, respectively. General and administrativeexpenses consisted primarily of personnel and related costs for generalcorporate functions, including finance, accounting, implementation of theSarbanes-Oxley Act of 2002, strategic and business development and legal.

 

The increase in general and administrative expensesduring the three months ended December 31, 2007 compared to the sameperiod in 2006 was primarily due to increases in (a) non-cash expensesrelated to stock option grants from $1,675,000 to $1,913,000, (b) salaries,compensation and recruiting fees from $2,068,000 to $2,618,000, and (c) professionalfees services from $482,000 to $1,365,000, mostly related to our implementationof internal controls over financial reporting required by the Sarbanes-OxleyAct of 2002.

 

We anticipate that our general and administrativeexpenses will decrease in future periods given our reduction in workforce andfacilities as a result of our restructuring efforts.

 

***Financial Income and Expense***

 

“Financial Income” and “Financial Expense” includesinterest and investment income, foreign currency remeasurement gains andlosses. Net interest expense was $629,000 and $1,633,000 for the three and ninemonths ended December 31, 2007, respectively, compared to $588,000 and$1,422,000 for the three and nine months ended December 31, 2006,respectively. We had increased interest expenses due to our amended SyntekPromissory Note These increases were partially offset by interest incomederived mainly from our cash and short-term investment balances.

 

We will incur increased interest expenses for theremainder of 2007 and beyond due to long-term debt issued in the 2007 Financingin which the 2007 Convertible Note bears an annual interest rate of 5% and theamortization of deferred expenses incurred as part of the 2007 Financing.Interest expenses also will increase given the accretion to the value of the 

 

 

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$6,500,000amended Syntek Promissory Note. We recorded accretion of $2,533,000 throughoutthe term of the amended Syntek Promissory Note. We recorded $1,099,000 duringthe nine months ended  December 31,2007.

 

***Income Taxes***

 

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

 

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

 

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

 

**Liquidity, Capital Resources and Going Concern Considerations**

 

Ourfinancial statements are presented on a going concern basis, which contemplatesthe realization of assets and satisfaction of liabilities in the normal courseof business. We have experienced significant losses and negative cash flowsfrom operations since incorporation. For the nine months ended December 31, 2007, weincurred a net loss of $21,879,000 and had an accumulated deficit of$297,494,000. This raises substantial doubt about our ability to continue as agoing concern. Our ability to continue as a going concern will depend upon ourability to raise additional capital during the next three months. We arepursuing raising additional capital to fund our operations although there is noassurance that such capital will be available to us. We also are seeking toexpand our revenue base by adding new customers. To further reduce expenses, weannounced a restructuring on February 4, 2008 designed to reduce ourannual operating expenses by $20,000,000 per year.

 

Failureto secure additional capital in the very short term or to expand our revenuebase in the longer term would result in depleting our available funds and notbeing able to pay our obligations when they become due. The accompanyingcondensed consolidated financial statements do not include any adjustments toreflect the possible future effects on the recoverability and classification ofassets or the amounts and classification of liabilities that may result fromour possible inability to continue as a going concern.

 

As of December 31, 2007, we had $17,733,000 ofcash, cash equivalents and short-term investments.

 

During the nine months ended December 31, 2007,net cash used in operations was $19,457,000, comprised mainly of our loss of$21,879,000, partially offset by (a) non-cash charges related todepreciation and amortization of $621,000, write-downs of inventory of  $183,000 and stock-based compensation of$4,018,000, (b) financing expenses of $1,122,000 resulting mainly fromaccretion of the amended Syntek Promissory Note, (c) an increase ofliability for employee rights upon retirement of $694,000 and (d) changesin other working capital accounts of $4,210,000.

 

During the nine months ended December 31, 2006,net cash used in operations was $12,635,000, comprised mainly of our loss of$21,446,000 partially offset by (a) non-cash charges related todepreciation and amortization of $621,000, write-downs of inventory of $514,000and stock-based compensation of $3,421,000, (b) a $350,000 increase inliability for employee rights upon retirement, (c) $1,105,000 of accretionand amortization of financing instruments, net and (d) changes in otherworking capital accounts of $2,829,000.

 

During the nine months ended December 31, 2007,net cash provided by investing activities was $4,042,000 comprised mainly ofthe sales and maturities of short-term investments, net of $4,515,000 inpurchases of short-term investments and $421,000 in purchases of property andequipment. During the nine months ended December 31, 2006, net 

 

 

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cashused in investing activities was $8,102,000, comprised mainly of the purchaseof $7,611,000 of short-term investments, net of sales and maturities of ourshort-term investments and purchases of property and equipment were $348,000.

 

Financingactivities in the nine months ended December 31, 2007 and 2006 wereapproximately $1,466,000 and $1,144,000, respectively, related primarily toproceeds we received upon the exercise of stock options.

 

We have purchase obligations to our suppliers thatsupport our operations in the normal cause of our business. The obligationsrequire us to purchase minimum quantities of the suppliers’ products at aspecified price. As of December 31, 2007 and December 31, 2006, wehad approximately $2,501,000 and $1,136,000, respectively, of purchaseobligations. These obligations are expected to become payable at various timesthrough 2008.

 

**Forward-LookingStatements**

 

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

 

·                  our belief that our ability to continue as a going concern will dependupon our ability to raise additional capital during the next three months;

 

·                  our belief that failure to secure additional capital in the very shortterm or to expand our revenue base in the longer term will result in depletingour available funds and not being able to pay our obligations when they becomedue;

 

·                  our expectationregarding the charges and reduction of expenses we expect will result afterimplementation of our restructuring plan, and the expected completion date ofthe plan;

 

·                  our expectation thatall functions currently performed in Israel will be moved to the United Statesby the quarter ended June 30, 2008;

 

·                  our expectation thatwe may apply to transfer the listing of our common stock to The Nasdaq CapitalMarket if we do not regain compliance with Nasdaq Marketplace Rule 4450(b)(1)(A) toremain listed on The Nasdaq Global Market;

 

·                  our belief thatour most critical accounting policies include policies related to revenuerecognition, inventory, extinguishment of debt, fair value of financialinstruments, debt issuance costs and stock-based compensation;

 

·                  our belief that SFAS 160 will not have a material impact on ourconsolidated financial statements;

 

·                  our anticipation that our revenues will remain concentrated among a fewcustomers for the foreseeable future;

 

·                  our anticipation that our gross margins will continue to fluctuate basedon our product and customer mix, revenue level and inventory valuations;

 

·                  our anticipation thatour research and development costs will decrease in the future due to ourrestructuring efforts and downsizing of our Wireless Solutions segment;

 

·                  our anticipation that our sales and marketing expenses will continue todecrease in future periods given our reduction in workforce as a result of ourrestructuring efforts;

 

 

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·                  our anticipation that general and administrative expenses will decrease infuture periods given our reduction in workforce and facilities as a result ofour restructuring efforts;

 

·                  our expectation that the losses of our Israeli subsidiaries will offsetcertain future earnings of the subsidiaries, if attained, during the tax-exemptperiod (provided under Israeli law); and

 

·                  our belief as to the payment of purchase obligations that are expected tobecome payable at various times through 2008.

 

Youcan identify these and other forward-looking statements by the use of wordssuch as “may,” “will,” “should,” “could,” “intend,” “expect,” “plan,” “estimate,”“project,” “anticipate,” “believe,” “potential,” “continue,” or the negative ofsuch terms, or other comparable terminology. The risks, uncertainties andassumptions referred to above that could cause our actual results to differmaterially from the results expressed or implied by such forward-lookingstatements include those set forth under Item 1A below and the risks,uncertainties and assumptions discussed from time to time in our other publicfilings and public announcements. All forward-looking statements included inthis document are based on information available to us as of the date hereof,and we assume no obligation to update these forward-looking statements.

 

**Item 3.****           ****Quantitativeand Qualitative Disclosures about Market Risk**

 

***We are exposed to financial market risks including changesin interest rates and foreign currency exchange rates. Substantially all of ourrevenue and capital spending is transacted in United States dollars, although asubstantial portion of the cost of our operations, relating mainly to ourpersonnel and facilities in Israel, is incurred in New Israeli Shekels. We havenot engaged in hedging transactions to reduce our exposure to fluctuations thatmay arise from changes in foreign exchange rates. In the event of an increasein inflation rates in Israel, or if appreciation of the New Israeli Shekelsoccurs without a corresponding adjustment in our dollar-denominated revenues,our results of operation and business could be materially harmed.***

*** ***

***As of***December 31, 2007, we had cash, cash equivalents and short-terminvestments of $17,733,000. Substantially all of these amounts consisted ofcorporate and government fixed income securities and money market funds thatinvest in corporate and government fixed income securities that are subject tointerest rate risk. We place our investments with high credit quality issuersand by policy limit the amount of the credit exposure to any one issuer.

*** ***

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

*** ***

***While all our cash equivalents and short-term investmentsare classified as “available-for-sale,” we generally have the ability to holdour fixed income investments until maturity and therefore we would not expectour operating results or cash flows to be affected to any significant degree bythe effect of a sudden change in market interest rates on our securitiesportfolio. We may not be able to obtain similar rates after maturity as aresult of fluctuating interest rates. We do not hedge any interest rateexposures.***

*** ***

***The fair value of our available-for-sale securities and cashequivalents is also sensitive to changes in the general level of interest ratesin the United States, and the fair value of our portfolio will fall if marketinterest rates increase. However, since we generally have the ability to holdthese investments to maturity, these declines in fair value may never berealized. If market interest rates were to increase by 10% from levels at December 31,2007, the fair value of our portfolio would decline by an immaterial amount.***

*** ***

***The potential change noted above is based on sensitivity analysesperformed on our financial position as of December 31, 2007. Actual resultsmay differ as our analysis of the effects of changes in interest rates does notaccount for, among other things, sales of securities prior to maturity andrepurchase of replacement securities, the change in mix or quality of theinvestments in the portfolio and changes in the relationship between short-termand long-term interest rates.***

*** ***

 

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**Item 4.            Controls and Procedures**

 

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

 

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

 

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

 

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

 

Ourbusiness is subject to substantial risks, including the risks described below.

 

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

 

Weneed additional capital to execute our business plan. If we are unsuccessful insecuring additional cash in the very short term , either through additionalequity and/or debt financings, we will not be able to successfully execute ourbusiness plan.  Further, if we do notsecure additional capital in the next three months, we may not be able tocontinue as a going concern.

 

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

 

Wehave incurred significant losses since our inception, and we expect to continueto incur losses for the foreseeable future. We incurred losses of $21,879,000for the nine months ended December 31, 2007 and as of that date our accumulated deficitwas $297,494,000. Our revenues and gross margins may not grow or even continueat their current levels and may decline even further. If our revenues do notrapidly increase, or if our expenses increase at a greater pace than ourrevenues, we will never become profitable.

 

**Since we have recently reduced our workforce, our researchand development efforts will be harmed.**

 

OnFebruary 4, 2008 we announced our intent to simplify our structure bystreamlining our corporate organization and reducing operating costs to betteraddress market needs and revenue opportunities in the cable industry.  Asignificant portion of these costs were related to our continuing strategy tofocus on our Cable Solutions segment, to consolidate our facilities in theUnited States and to significantly downsize our Wireless Solutions segment tosupport current customers only.

 

Theworkforce reduction of approximately 100 employees impacts all companyfunctions, both in Israel and the United States, and includes management andnon-management positions.

 

Thesereductions are in addition to a cost reduction program, announced July 23,2007, that reduced our workforce by approximately 16% (when compared to theworkforce levels as of June 30, 2007). The largest effect of thisreduction was on our research and development activities. Our ability to furtherdevelop and market our products may be limited if we have not accuratelypredicted the appropriate workforce requirements for our research anddevelopment efforts.

 

 

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**If we fail to achieve significant market penetration andcustomer acceptance of our cable products, our prospects would be substantiallyharmed.**

 

Themarket for broadband products in the cable industry is extremely competitive,subject to drastic technological changes, changes in capital expenditurebudgets and highly fragmented. Our products in the Cable Solutions segment arenew and relatively unknown; accordingly, we have not generated significantrevenue in this segment. We have only relatively recently shipped our firstcommercial orders for our UltraBand solution to various systems of a topmulti-service operator (“MSO”). There can be no assurance that installations ofour cable products will be successful. As some of our cable products continueto be in a development stage, we may face challenges such as market resistanceto new products, perceptions regarding customer support and quality control.

 

Wewill generate significant sales only if we are able to penetrate the market andcreate market share in this industry. If we are unable to do so, our businesswould be harmed and our prospects significantly diminished.

 

**Ourshares of common stock may be delisted from The Nasdaq Global Market and maynot qualify for listing on The Nasdaq Capital Market.**

 

On January 29, 2008,we received notification from the NASDAQ Listings Qualifications Departmentthat we do not comply with the minimum $50,000,000 market value of listedsecurities required for continued listing on The Nasdaq Global Market set forthin Marketplace Rule 4450(b)(1)(A). Accordingly, such securities are subject to delisting from The NasdaqGlobal Market. As of that date, NASDAQ’s calculation of the market value of ourlisted securities was $44,920,520 based on 18,639,220 shares outstanding and aclosing bid price of $2.41. There is no immediate change in the trading of ourcommon stock on The Nasdaq Global Market.

 

If we cannot demonstratecompliance by February 28, 2008, then NASDAQ will provide writtennotification to us that our securities will be delisted, subject to our rightto make an appeal to maintain our listing on The Nasdaq Global Market or toapply to list our securities on The Nasdaq Capital Market. During anyappeal process, our shares of common stock will continue to trade on The NasdaqGlobal Market. We also may apply to transfer our securities to The NasdaqCapital Market. If we do so before February 28, 2008, the initiation ofany delisting proceedings will be stayed pending review of ourapplication.  There can be no assurance that we will be able to successfullyappeal any delisting decision or that we will meet the criteria for transfer toThe Nasdaq Capital Market.

 

A delisting wouldnegatively impact the value of our common stock, as our common stock willlikely be less liquid and may trade with larger variations between the bid andask price. We also could lose support from institutional investors,brokerage firms and market makers, if any, that currently buy and sell ourstock and may find it difficult to obtain future financing for the continuationof our operations or to use our stock in acquisitions. Further, delistingcould result in the loss of confidence by our suppliers, customers andemployees.  Any of these results couldnegatively impact our business.

 

**We have written down and may need to further write-down ourinventory in the future if our sales levels do not match our expectations, orif selling prices decline more than we anticipate, which could adversely impactour operating results.**

 

Weoperate in an industry that is characterized by intense competition, supplyshortages or oversupply, rapid technological change, unpredictable salespatterns, declining average selling prices and rapid product obsolescence, allof which make it more challenging to effectively manage our inventory. Inaddition, some of the components we require have long lead-times and we arerequired to order or build inventory well in advance of the time of anticipatedsales.

 

Ourinventory is stated at the lower of cost or market value. Determining marketvalue of our inventory requires numerous judgments, including, but not limitedto, judgments regarding average selling prices and sales volumes for futureperiods. We primarily utilize estimated selling prices for measuring anypotential declines in market value below cost. When market value is determinedto be below cost, we make appropriate allowances to reduce the value ofinventories to net realized value. We may reduce the value of our inventorywhen we determine that inventory is slow moving, obsolete or excessive or if theselling price of the product is insufficient to cover product costs and sellingexpenses.

 

Inthis regard, our inventory increased substantially in 2005 because sales weresubstantially less than our anticipated demand and we were required to makeadvance inventory purchase commitments for anticipated sales. Accordingly, werecorded a write down of inventory and non-cancelable purchase commitments of$424,000 and $2,050,000 

 

 

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forthe years ended December 31, 2006 and 2005, respectively. For the threeand nine months ended December 31, 2007, werecorded a write down of inventory of $0 and $183,000, respectively.

 

Ifour sales do not increase, the sales price of our products decrease or we areotherwise unable to control inventory levels consistent with actual demand, wemay be required to write down additional inventory. Any such write-down wouldadversely affect our operating results in future periods.

 

**If we default under the 2007 Convertible Note delivered toGoldman, Sachs & Co., the principal and accrued interest would becomedue and payable which would substantially harm our cash position and businessprospects.**

 

OnMarch 28, 2007, we closed the 2007 Financing which included delivery ofthe 2007 Convertible Note in the principal amount of $35,000,000. The 2007Convertible Note contains events of default that, if triggered, would requireus to pay the principal and accrued interest under such note immediately (afterthe expiration of applicable cure periods). If an event of default occurs underthe 2007 Convertible Note and the holder declares all outstanding principal andinterest immediately due and payable, our cash position and business prospectswould be substantially harmed.

 

**Our success will depend on future demand for additionalbandwidth by MSOs and their customers and the willingness and ability of MSOsto substantially increase available bandwidth on their networks using ouralternative technology solution.**

 

Becauseour cable products expand available bandwidth over existing infrastructure,demand for these products depends on demand for additional bandwidth by MSOsand their customers. The scope and timing of customer demand for additionalbandwidth is uncertain and hard to predict. The factors influencing this demandinclude competitive offerings, applications availability, pricing models,costs, regulatory requirements and the success of initial roll-outs.

 

Forour cable products to be sold in significant quantities, MSOs also must bewilling and able to substantially increase the available bandwidth on theirnetworks. MSOs may not be willing or able to develop additional services andrevenue streams to justify the deployment of our technology. If the futuredemand for bandwidth is insubstantial, is addressed by alternative technologiesor does not develop in the near future, our prospects would be adverselyaffected.

 

**We have not yet produced or deployed our cable products inhigh volumes.**

 

Wehave not yet produced our UltraBand solutions in high volumes and there may bechallenges and unexpected delays, such as quality control issues, in ourattempts to increase volume and lower production costs. Our long-term successdepends on our ability to produce high quality products at a low cost and, inparticular, to reduce the production cost of our cable products designed forresidential use.

 

Becausewe have not yet deployed our UltraBand solutions in high volumes, there issignificant technology risk associated with any such future deployment. We cannotbe sure that any such high volume deployment would be successful.

 

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

 

Futuredemand for our broadband products will depend significantly on the growingmarket acceptance of several emerging broadband services, including digitalvideo, video-on-demand, high definition television, very high-speed dataservices and voice-over-internet protocol (“VoIP”) telephony. The effectivedelivery of these services will depend in part on a variety of new networkarchitectures, such as fiber-to-the premises networks, video compressionstandards such as MPEG-4 and Microsoft’s Windows Media 9, the greater use ofprotocols such as IP and the introduction of new consumer devices, such asadvanced set-top boxes and digital video recorders. If adoption of theseemerging services and/or technologies is not as widespread or as rapid as weexpect, our net sales growth would be materially and adversely affected.

 

 

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

 

·                                          convergence, orthe desire of certain operators to provide a combination of video, voice anddata services to consumers, also known as the “triple play;”

 

·              the use ofdigital video by businesses and governments;

 

·              theprivatization of state owned telecommunication companies in other countries;

 

·                                          efforts byregulators and governments in the United States and abroad to encourage theadoption of broadband and digital technologies; and

 

·                                          the extent andnature of regulatory attitudes toward such issues as competition betweenoperators, access by third parties to networks of other operators and newservices such as VoIP.

 

If,for instance, operators do not pursue the triple play as aggressively as weexpect, 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.

 

**We will need to develop distribution channels to market andsell our cable products.**

 

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

 

Todevelop such channels and market and sell our cable products, we need to growour sales and marketing team. It may be difficult for us to hire and retainadditional qualified personnel. We currently have limited exposure to globalbusiness opportunities, and will not be able to take advantage of meaningfulpotential global demand for our products unless and until we are able todevelop meaningful global distribution channels and strategies.

 

**Because of our long product development process and salescycle, we may continue to incur substantial expenses without sufficientrevenues that could cause our operating results to fluctuate.**

 

Acustomer’s decision to purchase our products typically involves a significant technicalevaluation, formal internal procedures associated with capital expenditureapprovals and testing and acceptance of new systems that affect key operations.For these and other reasons, the sales cycle associated with our systems can belengthy and subject to a number of significant risks, over which we have littleor no control. Because of the growing sales cycle and the likelihood that wemay rely on a small number of customers for our revenues, our operating resultswould be seriously harmed if such revenues do not materialize when anticipated,or at all.

 

**We depend on cable and telecommunications industry capitalspending for our revenue and any decrease or delay in such spending wouldadversely affect our prospects.**

 

Demandfor our products will depend on the size and timing of capital expenditures bytelecommunications service providers and MSOs. These capital spending patternsare dependent upon factors including:

 

·              theavailability of cash or financing;

 

·              budgetaryissues;

 

·              regulationand/or deregulation of the telecommunications industry;

 

·              competitivepressures;

 

·              alternativetechnologies;

 

·              overall demandfor broadband services, particularly relatively new services such as VoIP;

 

 

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·              industrystandards;

 

·              the pattern ofincreasing consolidation in the industry; and

 

·              generalconsumer spending and overall economic conditions.

 

IfMSOs and telecommunications service providers do not make significant capitalexpenditures, our prospects would be adversely affected.

 

**If telecommunications service providers and systemsintegrators do not promote and purchase our products, or if thetelecommunications equipment market does not grow, our business will beseriously harmed.**

 

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

 

Marketconditions remain difficult and capital spending plans are often constrained.It is likely that further industry restructuring and consolidation will takeplace. Companies that have historically not had a large presence in thebroadband access equipment market have expanded their market share throughmergers and acquisitions. The continued consolidation of our competitors couldhave a significant negative impact on us. Further, our competitors may bundletheir products or incorporate functionality into existing products in a mannerthat discourages users from purchasing our products or which may require us tolower our selling prices resulting in lower gross margins.

 

Ifthe telecommunications market, and in particular the market for broadbandaccess equipment, does not improve and grow, our business would besubstantially harmed.

 

**Competition may result in lower average selling prices, andwe may be unable to reduce our costs at offsetting rates, which may impair ourability to achieve profitability.**

 

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

 

**If the communications, Internet and cable televisionindustries do not grow and evolve in a manner favorable to our businessstrategy, our business may be seriously harmed.**

 

Ourfuture success depends upon the growth of the communications industry, thecable television industry and, in particular, the Internet. These marketscontinue to evolve rapidly because of advances in technology and changes incustomer demand. We cannot predict growth rates or future trends in technologydevelopment. It is possible that cable operators, telecommunications companiesor other suppliers of broadband services will decide to adopt alternativearchitectures or technologies that are incompatible with our current or futureproducts. If we are unable to design, develop, manufacture and sell productsthat incorporate or are compatible with these new architectures ortechnologies, our business will suffer. Also, decisions by customers to adoptnew technologies or products are often delayed by extensive evaluation andqualifications processes and can result in delays of current products.

 

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

 

 

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**The loss of one or more of our key customers would result ina loss of a significant amount of our revenues and adversely affect ourbusiness.**

 

Arelatively small number of customers account for a large percentage of ourrevenues, as set forth in the table below:

 
| ** **                | ** ** | **Three Months  Ended December 31,** | ** ** | **Nine Months  Ended December 31,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Customer A, related party |       | 66                                                  | %          | 77                                                 | %          | 67 | % | 87 | % |
| Customer B                |       | 32                                                  | %          | 19                                                 | %          | 31 | % | 11 | % |

 

Weexpect that we will continue to depend on a limited number of customers for asubstantial portion of our revenues in future periods. The loss of a majorcustomer could seriously harm our ability to sustain revenue levels, whichwould seriously harm our operating results.

 

Inthis regard, sales to Customer A in the three months ended December 31,2007 accounted for the vast majority of our sales during that year. Thiscustomer was formed in 2006 and has a very limited history of operations,profitable or otherwise. If this customer is not successful in operating itsbusiness, or if sales to this customer are lower than our expectations, ourwireless business could be harmed. Notwithstanding the foregoing, as sales toCustomer A were made by our Wireless Solutions segment, if this customer is notsuccessful, the effect to us will be tempered given the refocus of our internalresources on our Cable Solutions segment. In this regard, we expect that asignificant source of our revenues in the coming years will be derived from ourCable Solutions segment rather than our Wireless Solutions segment.

 

Wehave designed products for our Wireless Solutions segment to meet thespecifications of Customer A based on that customer’s assessment of the utilitysector. Sales in our Wireless Solutions segment could be adversely affected ifCustomer A has not accurately assessed the needs of the utility sector.

 

**If we do not effectively manage our costs, our business couldbe substantially harmed.**

 

Wehave increased certain expenses to address new business opportunities in theCable Solutions segment, and we will need to continue to monitor closely ourcosts and expenses. If the market for our cable solutions does not expand ortakes longer to develop than we expect, we may need to further reduce ouroperations.

 

**If we do not adequately protect our intellectual property, wemay not be able to compete and our ability to provide unique products may becompromised.**

 

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

 

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

 

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

 

 

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**Because substantially all of our revenues are generated inUnited States dollars while a portion of our expenses are incurred in NewIsraeli Shekels, our results of operations could be seriously harmed if therate of inflation in Israel exceeds the rate of devaluation of the New IsraeliShekel against the United States dollar.**

 

Ourfunctional currency is the United States dollar. We generate substantially allof our revenues in United States. dollars, but we incur a substantial portionof our expenses, principally salaries and related personnel expenses related toresearch and development, in New Israeli Shekels. As a result, we are exposedto the risk that the rate of inflation in Israel will exceed the rate ofdevaluation of the NIS in relation to the dollar or that the timing of thisdevaluation lags behind inflation in Israel.

 

**We may not be able to successfully operate businesses that wemay acquire, in a cost-effective and non-disruptive manner and realizeanticipated benefits.**

 

Wemay explore investments in or acquisitions of other companies, products ortechnologies, including companies or technologies that are not complementary orrelated to our current solutions. We ultimately may be unsuccessful inoperating and/or integrating an acquired company’s personnel, operations,products and technologies into our business. These difficulties may disrupt ourongoing business, divert the time and attention of our management and employeesand increase our expenses.

 

Moreover,the anticipated benefits of any acquisition may not be realized or may not berealized in the time period we expect. Future acquisitions could result indilutive issuances of equity securities, the incurrence of debt, contingentliabilities or amortization expenses related to goodwill and other identifiableintangible assets and the incurrence of large and immediate write-offs, any ofwhich could seriously harm our business. In addition, we could spendsignificant resources in searching for and investigating new businessopportunities, and ultimately may be unsuccessful in acquiring new businesses.

 

**Our participation or lack of participation in industrystandards groups may adversely affect our business.**

 

Wedo not participate in the standards process of the Cable TelevisionLaboratories, Inc., a cable industry consortium that establishes cabletechnology standards and administers compliance testing. In the future, we maydetermine to join or not join other standards or similar organizations. Ourmembership in these organizations could dilute our proprietary intellectualproperty rights in our products while our failure to participate in otherscould jeopardize acceptance of any of our products that do not meet industrystandards.

 

**Product standardization, as may result from initiatives ofMSOs, could adversely affect our prospects.**

 

Productstandardization initiatives encouraged by MSOs and telecommunications companiesmay adversely affect revenues, gross margins and profits. In the past,standardization efforts by major MSOs have negatively impacted equipmentvendors by leading to equipment obsolescence, commoditization and reducedmargins. If our products do not comply with future standards, our prospectscould be adversely affected.

 

**Our quarterly operating results fluctuate, which may causeour share price to decline.**

 

Ourquarterly operating results have varied significantly in the past and arelikely to vary significantly in the future. These variations result from anumber of factors, including:

 

·                                          the uncertaintiming and level of market acceptance for our systems and the uncertain timingand extent of rollouts of broadband access equipment and systems by the majorservice providers;

 

·                                          the fact thatwe often recognize a substantial proportion of our revenues in the last fewweeks of each quarter;

 

·                                          the ability ofour existing and potential direct customers to obtain financing for thedeployment of broadband access equipment and systems;

 

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

 

·                                          reductions inpricing by us or our competitors;

 

 

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·              global economicconditions;

 

·                                          theeffectiveness of our system integrator customers in marketing and selling theirnetwork systems equipment;

 

·              changes in theprices or delays in deliveries of the components we purchase or license; and

 

·              anyacquisitions or dispositions we may effect.

 

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

 

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

 

Ourreliance on international suppliers exposes us to foreign political andeconomic risks, which may impair our ability to generate revenues. These risksinclude:

 

·              economic,inflation and political instability;

 

·              terrorist acts,international conflicts and acts of war;

 

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

 

·              changes inregulatory requirements and licensing frequencies to service providers;

 

·              import orexport licensing requirements and tariffs;

 

·              labor shortagesor stoppages;

 

·              traderestrictions and tax policies; and

 

·              limitedprotection of intellectual property rights.

 

Anyof the foregoing difficulties of conducting business internationally couldseriously harm our business.

 

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

 

Wegenerally sell our broadband access equipment and systems based on individualpurchase orders. Our customers generally are not obligated by agreements topurchase our systems, and the agreements we have entered into do not obligateour customers to purchase a minimum number of systems. Our customers cangenerally cancel or reschedule orders on short notice and discontinue using oursystems at any time. Further, having a successful field system trial does notnecessarily mean that the customer will order large volumes of our systems. Thereduction, delay or cancellation of orders from one or more of our customerscould seriously harm our operating results.

 

**The effects of regulatory actions could impact spectrumallocation and frequencies worldwide and cause delays or otherwise negativelyimpact the growth and development of the broadband market, which wouldadversely affect our business.**

 

Countriesworldwide are considering or are in the process of allocating frequencies forwireless applications, but not all markets have done so. If the United Statesand/or other countries do not provide sufficient spectrum for wirelessapplications or reallocate spectrum in the wireless frequency bands for otherpurposes, our customers may delay or cancel deployments in broadband wireless,which could seriously harm our business. Further, if our customers are unableto obtain licenses or sufficient spectrum in the wireless frequency bands ourbusiness could be seriously harmed.

 

 

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Thecable industry is also heavily regulated and changes in the regulatorylandscape may adversely affect our business. For example, cable operators arecurrently required to carry a significant number of analog channels. Areduction or elimination of this requirement may free bandwidth for theseoperators and reduce the potential market for our products.

 

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

 

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

 

·              productperformance, features and reliability;

 

·              price;

 

·              stability;

 

·              scope ofproduct line;

 

·              sales anddistribution capabilities;

 

·              technicalservice and support;

 

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

 

·              industrystandards.

 

Certainof our competitors and potential competitors have substantially greaterfinancial, technical, distribution, marketing and other resources than we haveand, therefore, may be able to respond more quickly to new or changingopportunities, technologies and other developments. In addition, many of ourcompetitors have longer operating histories, greater name recognition, broaderproduct lines and established relationships with system integrators and serviceproviders. Our primary competitors are Cisco Systems, Inc. through theirScientific Atlanta subsidiary; Motorola, Inc.; BigBand Networks, Inc.;C-Cor Incorporated and Narad Networks, Inc. Most of these competitors haveexisting relationships with one or more of our prospective customers. In thecable industry, our cable offerings face competition from technologies such asdigital set-top boxes, high-end compression technologies and DVRs. Furthermore,the move toward open standards may increase the number of operators who willoffer new services, which in turn may increase the number of competitors anddrive down the capital expenditures per subscriber deployed. We may not be ableto compete successfully against our current and future competitors, andcompetitive pressures could seriously harm our business.

 

**Hardware defects or firmware errors could increase our costsand impair the market acceptance of our systems, which would adversely affectour future operating results.**

 

Oursystems occasionally contain certain defects or errors. This may result eitherfrom defects in components supplied by third parties or from errors or defectsin our firmware or hardware that we have not detected. We have in the pastexperienced, and may experience from time-to-time, defects in new or enhancedproducts and systems after shipments, or defects in deployed systems. Thiscould occur in connection with stability or other performance problems. Ourcustomers integrate our systems into their networks with components from othervendors. Accordingly, when problems occur in a network system, it may bedifficult to identify the component that caused the problem. Regardless of thesource of these defects or errors, we will need to divert the attention of ourengineering personnel from our product development efforts to address thedefect or error. We have incurred in the past and may again incur significantwarranty and repair costs related to defects or errors, and we also may besubject to liability claims for damages related to these defects or errors. Theoccurrence of defects or errors, whether caused by our systems or thecomponents of another vendor, may result in significant customer relationshipproblems and injury to our reputation and may impair the market acceptance ofour systems.

 

 

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**We depend on contract manufacturers and third party equipmentand technology suppliers, and these manufacturers and suppliers may be unableto fill our orders or develop compatible, required technology on a timelybasis, which would result in delays that could seriously harm our results ofoperations.**

 

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

 

Inaddition to sales to system integrators, we also sell in some instancesdirectly to service providers. Such direct sales require us to resell equipmentto service providers manufactured by third party suppliers and to integratethis equipment with the equipment we manufacture. We are particularly dependenton third party radio suppliers in selling our 3GHz and other products. Wecurrently have limited relationships with third party suppliers. If we areunable to establish meaningful relationships with suppliers, or if thesesuppliers are unable to provide equipment that meets the specifications of ourcustomers on the delivery schedules required by our customers, and atacceptable prices, our business would be substantially harmed.

 

OurUltraBand solutions are implemented over the HFC plant and, as such, theyinterface and integrate with existing products from multiple other vendors.Future offerings by these vendors may not be sufficiently compatible with ourUltraBand solutions. In addition, we depend on the continuous delivery ofcomponents by various manufacturers of electronic connectors, filters, boardsand transistors.

 

Furthermore,we have produced certain of our products only in limited quantities. If demandfor these products increases significantly, we will need to implement andaddress additional processes, procedures and activities necessary to supportincreased production. If we are unable to do so, our business would besubstantially harmed.

 

**We obtain some of the components included in our solutionsfrom a single source or a limited group of suppliers, and the loss of any ofthese suppliers or delay or shortages in the supply of components could causeproduction delays and a substantial loss of revenue.**

 

Wecurrently obtain key components from a limited number of suppliers. Some ofthese components are obtained from a single source supplier. We generally donot have long-term supply contracts with our suppliers.  Further, we have experienced delays andshortages on more than one occasion. These factors present us with thefollowing risks:

 

·                                    delays indelivery or shortages in components could interrupt and delay manufacturing andresult in cancellation of orders for our systems;

 

·            suppliers couldincrease component prices significantly and with immediate effect;

 

·                                    we may not beable to develop alternative sources for system components, if or as required inthe future;

 

·                                    suppliers coulddiscontinue the manufacture or supply of components used in our systems. Insuch event, we might need to modify our systems, which may cause delays inshipments, increased manufacturing costs and increased systems prices; and

 

·                                    we may holdmore inventory than is immediately required to compensate for potentialcomponent shortages or discontinuation.

 

 

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Theoccurrence of any of these or similar events would harm our business.  Our inability to obtain adequatemanufacturing capacity at acceptable prices, or any delay or interruption insupply, could reduce our revenues or increase our cost of revenue and could seriouslyharm our business.

 

**Third parties may bring infringement claims against us thatcould harm our ability to sell our products and result in substantialliabilities.**

 

Thirdparties could assert, and it could be found, that our technologies infringe theirproprietary rights. We could incur substantial costs to defend any litigation,and intellectual property litigation could force us to do one or more of thefollowing:

 

·              obtain licensesto the infringing technology;

 

·              pay substantialdamages under applicable law;

 

·              cease themanufacture, use and sale of infringing products; or

 

·              expendsignificant resources to develop non-infringing technology.

 

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

 

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

 

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

 

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

 

**We are incurring additional costs and devoting moremanagement resources to comply with increasing regulation of corporategovernance and disclosure.**

 

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

 

Asa public company, our systems of internal controls over financial reporting arerequired to comply with the standards adopted by the Securities and ExchangeCommission (“SEC”) and the Public Company Accounting Oversight Board (the “PCAOB”).We will be required to make our first annual certification on our internalcontrols over financial reporting in our annual report for the fiscal yearended March 31, 2008. In preparing for such certification, we areevaluating 

 

 

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ourinternal controls for compliance with applicable SEC and PCAOB requirements,and we may be required to design enhanced processes and controls to addressissues identified through this review. This could result in significant delaysand cost to us and require us to divert substantial resources, includingmanagement time, from other activities. We have commenced a review of ourexisting internal control structure and may need to hire additional personnel.Although our review is not complete, we are taking steps to improve our internalcontrol structure by dedicating internal resources to analyze and improve ourinternal controls, to be supplemented periodically with outside consultants asneeded. However, if we fail to achieve and maintain the adequacy of ourinternal controls, we may not be able to conclude that we have effectiveinternal controls over financial reporting as of March 31, 2008. Moreover,although we will continue to review and evaluate the effectiveness of ourinternal controls, we can give no assurance that there will be no materialweaknesses in our internal control over financial reporting. We may in thefuture have material weaknesses or other control deficiencies in our internalcontrol over financial reporting as a result of our controls becominginadequate due to changes in conditions, the degree of compliance with ourinternal control policies and procedures deteriorating, or for other reasons.If we have significant deficiencies or material weaknesses or other controldeficiencies in our internal control over financial reporting, our ability torecord, process, summarize and report financial information within the timeperiods specified in the rules and forms of the SEC will be adverselyaffected. This failure could materially and adversely impact our business, ourfinancial condition and the market value of our securities.

 

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

 

**Our success depends significantly on Davidi Gilo, ourChairman of the Board of Directors, and Wayne H. Davis, our Chief ExecutiveOfficer, the loss of either of whom could seriously harm our business.**

 

Ourfuture success depends in large part on the continued services of our seniormanagement and key personnel. In particular, we significantly depend on theservices of Davidi Gilo, our Chairman of the board of directors, and Wayne H.Davis, our Chief Executive Officer. We do not carry key person life insuranceon our senior management or key personnel. Any loss of the services of Messrs. Giloor Davis or other members of senior management or other key personnel couldseriously harm our business.

 

**Recent regulations related to equity compensation couldadversely affect earnings, affect our ability to raise capital and affect ourability to attract and retain key personnel.**

 

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

 

**The government programs and benefits we receiverequire us to satisfy prescribed conditions. These programs and benefits may beterminated or reduced in the future, which would increase our costs and taxesand could seriously harm our business.**

 

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

 

 

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seriouslyharm our business. As of the date hereof, our Israeli subsidiaries haveaccumulated loss carry forwards for Israeli tax purposes and therefore have notenjoyed any tax benefits under current approved enterprise programs.

 

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

 

Asof April 1, 2005, the government of Israel eliminated the ability ofcompanies to submit new applications for approved enterprise status. Thischange in the government policy may hinder us in the future with respect to anybenefits we may have received for new undertakings which would have beenentitled to “approved enterprise” status.

 

**We may lose our United States income tax net operating losscarryforwards if we experience a significant change in ownership.**

 

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

 

**Several of our directors and certain officers haverelationships with Davidi Gilo and his affiliated companies that could bedeemed to limit their independence.**

 

Severalmembers of our board of directors, Lewis Broad, Neill Brownstein, AvrahamFischer, Samuel Kaplan and Alan Zimmerman and certain of our officers, have hadprofessional relationships with Davidi Gilo, our Chairman of the board ofdirectors and former Chief Executive Officer, and his affiliated companies forseveral years. These members of our board of directors previously served on theboards of directors of DSP Communications, Inc. and/or DSP Group, Inc.,of which Mr. Gilo was formerly the controlling stockholder and theChairman of the board. In addition, Avraham Fischer is a senior partner of thelaw firm of Fischer, Behar, Chen & Co., which represents us on mattersrelating to Israeli law, is an investor and co-chief executive officer of anIsraeli investor group in which Mr. Gilo was an investor until October 2005,and is co-chief executive officer and a director of Clal Industries andInvestments, Ltd., which has made a significant investment in ANI, arelated party of our company. The long-term relationships between thesedirectors and officers and Mr. Gilo and his affiliated companies could beconsidered to limit their independence.

 

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

 

Asof December 31, 2007, ourmanagement collectively owned approximately 29% of our outstanding common stock(based on the number of shares owned by these individuals and the number ofshares issuable upon exercise of options within 60 days of December 31, 2007).

 

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

 

·              electing membersto our board of directors;

 

·              approvingsignificant change-in-control transactions;

 

·              determiningthe amount and timing of dividends paid to themselves and to our publicstockholders; and

 

·              controlling ourmanagement and operations.

 

Thisconcentration of ownership may have the effect of impeding a merger,consolidation, takeover or other business consolidation involving us, ordiscouraging a potential acquirer from making a tender offer for our shares.This 

 

 

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concentrationof ownership could also negatively affect our stock’s market price or decreaseany premium over market price that an acquirer might otherwise pay.

 

**Because stock markets are likely to continue to experienceextreme price and volume fluctuations, the price of our stock may decline.**

 

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

 

·              actual oranticipated variations in our quarterly operating results or those of ourcompetitors;

 

·              announcementsby us or our competitors of new products or technological innovations;

 

·              introductionand adoption of new industry standards;

 

·              changes infinancial estimates or recommendations by securities analysts;

 

·              changes in themarket valuations of our competitors;

 

·              announcementsby us or our competitors of significant acquisitions or partnerships; and

 

·              sales of ourcommon stock.

 

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

 

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

 

Inthe past, securities class action litigation has often been brought against acompany following periods of volatility in the market price of its securities.We could become the target of similar litigation in the future. Securitieslitigation could result in substantial costs and divert management’s attentionand resources, which could seriously harm our business and operating results.

 

**If securities or industry analysts do not publish research orreports about our business, if they change their recommendations regarding ourshares adversely or if our operating results to not meet their expectations,the price of our common stock could decline.**

 

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

 

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

 

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

 

·                                          our board ofdirectors has the authority to issue common stock and preferred stock and todetermine the price, rights and preferences of any new series of preferredstock without stockholder approval;

 

 

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·              our board ofdirectors is divided into three classes, each serving three-year terms;

 

·                                          super majorityvoting is required to amend key provisions of our Fifth Amended and RestatedCertificate of Incorporation and Amended and Restated Bylaws;

 

·              there arelimitations on who can call special meetings of stockholders;

 

·              stockholdersare not able to take action by written consent; and

 

·              advance noticeis required for nominations of directors and for stockholder proposals.

 

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

 

**It may be difficult to enforce a judgment in the UnitedStates against us and certain directors.**

 

Twoof our directors are not residents of the United States, and a  large portion of our assets and the assets ofthese persons are located outside the United States. Therefore, it may bedifficult to enforce a judgment obtained in the United States based upon thecivil or criminal liabilities provisions of the United States federalsecurities laws against us or any of those persons or to effect service ofprocess upon these persons in the United States.

 

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

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                         | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                |       |                                                                                                                                                                                                                 |       |
| 3.1                 |       | Fifth Amended and Restated  Certificate of Incorporation. Previously filed as an exhibit to our Quarterly  Report on Form 10-Q for the period ended March 31, 2007, and  incorporated herein by reference. |       |
|                |       |                                                                                                                                                                                                                 |       |
| 3.2                 |       | Amended and Restated  Bylaws. Previously filed as an exhibit to our Quarterly Report on  Form 10-Q for the period ended March 31, 2007, and incorporated  herein by reference.                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 4.1                 |       | Reference is made to  Exhibits 3.1 and 3.2 above.                                                                                                                                                                    |       |
|                |       |                                                                                                                                                                                                                 |       |
| 10.1                |       | Amended and Restated  Consulting Agreement of James A. Chiddix, effective as of February 1,  2008.                                                                                                              |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.1                |       | Certificate of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.2                |       | Certificate of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 32.1                |       | Certificate of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                            |       |

 

 

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**SIGNATURES**

 

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

 

Date:February 14, 2008

 

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

 

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                          | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                           | ** ** |
| 3.1                 |       | Fifth Amended and Restated  Certificate of Incorporation. Previously filed as an exhibit to our Quarterly  Report on Form 10-Q for the period ended March 31, 2007, and  incorporated herein by reference. |       |
|                |       |                                                                                                                                                                                                                 |       |
| 3.2                 |       | Amended and Restated  Bylaws. Previously filed as an exhibit to our Quarterly Report on  Form 10-Q for the period ended March 31, 2007, and incorporated  herein by reference.                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 4.1                 |       | Reference is made to  Exhibits 3.1 and 3.2 above.                                                                                                                                                                    |       |
|                |       |                                                                                                                                                                                                                 |       |
| 10.1                |       | Amended and Restated  Consulting Agreement of James A. Chiddix, effective as of February 1,  2008.                                                                                                              |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.1                |       | Certificate of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 31.2                |       | Certificate of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                             |       |
|                |       |                                                                                                                                                                                                                 |       |
| 32.1                |       | Certificate of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adapted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                            |       |

 

 

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