** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM10-Q**

 

**(MarkOne)**

 

**ý****        ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe Quarterly Period Ended March 31, 2006**

 

**or**

 

**o****        ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from             to             **

 

**CommissionFile Number 000-30189**

 

----

 

**VYYOINC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act (Checkone):Large accelerated filer o   Acceleratedfiler o    Non-acceleratedfiler ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o  No  ý

 

As of May 9, 2006, therewere 17,676,007 shares of Common Stock outstanding.

 

 

----

 

**INDEX**

 

**VYYO INC.**

 
|                                                                                                                | **Page No.** |
|---------------------------------------------------------------------------------------------------------------------|-------------------|
| PART I. FINANCIAL INFORMATION                                                                                       |              |
|                                                                                                                |              |
| Item 1. Condensed  Consolidated Financial Statements                                                           |              |
|                                                                                                                |              |
| Condensed Consolidated Balance  Sheets at March 31, 2006 and December 31, 2005                                 | 1                 |
|                                                                                                                |              |
| Condensed Consolidated  Statements of Operations for the Three Months Ended March 31, 2006 and  March 31, 2005 | 2                 |
|                                                                                                                |              |
| Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2006 and  March 31, 2005 | 3                 |
|                                                                                                                |              |
| Notes to Condensed  Consolidated Financial Statements                                                               | 4                 |
|                                                                                                                |              |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations            | 18                |
|                                                                                                                |              |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                            | 25                |
|                                                                                                                |              |
| Item 4.  Controls and Procedures                                                                               | 26                |
|                                                                                                                |              |
| PART II. OTHER  INFORMATION                                                                                         |              |
|                                                                                                                |              |
| Item 1A. Risk Factors                                                                                               | 26                |
|                                                                                                                |              |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                           | 40                |
|                                                                                                                |              |
| Item 6. Exhibits                                                                                               | 41                |
|                                                                                                                |              |
| SIGNATURES                                                                                                          | 42                |

 

i

----

 

**PART****I.****         FINANCIALINFORMATION**

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

 

**Vyyo Inc.**

**ConsolidatedBalance Sheets**

**(In thousands, except share data)**

 
| ** **                                                                                                                                                                                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                                    |       |                |       |                   |       |
| **Current Assets:**                                                                                                                                                                                           |       |                |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                   | 27,009     |                   | $          | 2,548 |   |
| Short-term  investments                                                                                                                                                                                       |       | 3,664               |       | 7,403                  |       |
| Accounts  receivable, net                                                                                                                                                                                     |       | 704                 |       | 868                    |       |
| Inventory (note  2)                                                                                                                                                                                           |       | 1,504               |       | 2,491                  |       |
| Other                                                                                                                                                                                                         |       | 964                 |       | 935                    |       |
| **Total Current  Assets**                                                                                                                                                                                     |       | 33,845              |       | 14,245                 |       |
| **Long-Term Assets:**                                                                                                                                                                                         |       |                |       |                   |       |
| Restricted cash  (note 4)                                                                                                                                                                                     |       | 5,000               |       | 5,000                  |       |
| Property and  equipment, net                                                                                                                                                                                  |       | 1,390               |       | 1,585                  |       |
| Employee rights  upon retirement funded (note 7)                                                                                                                                                              |       | 996                 |       | 965                    |       |
| **TOTAL  ASSETS**                                                                                                                                                                                             |       | $                   | 41,231     |                   | $          | 21,795 |   |
| ** **                                                                                                                                                                                                    |       |                |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                 |       |                |       |                   |       |
| **Current Liabilities:**                                                                                                                                                                                      |       |                |       |                   |       |
| Accounts payable                                                                                                                                                                                              |       | $                   | 1,453      |                   | $          | 1,832 |   |
| Accrued  liabilities (note 6)                                                                                                                                                                                 |       | 7,082               |       | 6,391                  |       |
| **Total Current  Liabilities**                                                                                                                                                                                |       | 8,535               |       | 8,223                  |       |
| ** **                                                                                                                                                                                                    |       |                |       |                   |       |
| **Long-Term Liabilities:**                                                                                                                                                                                    |       |                |       |                   |       |
| Promissory note  (note 4)                                                                                                                                                                                     |       | 4,284               |       | 3,967                  |       |
| Senior secured  note (note 8)                                                                                                                                                                                 |       | 4,484               |       | —                 |       |
| Convertible note  (note 8)                                                                                                                                                                                    |       | 9,313               |       | —                 |       |
| Liability for  employee rights upon retirement (note 7)                                                                                                                                                       |       | 1,761               |       | 1,460                  |       |
| **Total Liabilities**                                                                                                                                                                                         |       | 28,377              |       | 13,650                 |       |
| **Stockholders’ Equity:**                                                                                                                                                                                |       |                |       |                   |       |
| Preferred stock,  $0.001 par value; 5,000,000 shares authorized, none issued                                                                                                                                  |       | —              |       | —                 |       |
| Common stock,  $0.0001 par value and paid in capital; 50,000,000 shares authorized, 17,659,464  and 15,721,334 shares issued and outstanding at March 31, 2006 and December 31,  2005, respectively |       | 256,003             |       | 243,314                |       |
| Notes receivable  from stockholders                                                                                                                                                                           |       | (19                 | )          | (19                    | )          |
| Accumulated  deficit                                                                                                                                                                                          |       | (243,130            | )          | (235,150               | )          |
| **Total Stockholders’  Equity**                                                                                                                                                                          |       | 12,854              |       | 8,145                  |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           |       | $                   | 41,231     |                   | $          | 21,795 |   |

 

*Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements.*

 

----

 

**VyyoInc.**

**Condensed Consolidated Statementsof Operations**

**(Inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| **REVENUES**                                                                                             |       |                              |       |   |   |
| Revenues (note  11)                                                                                      |       | $                                 | 569        |   | $ | 704 |   |
| Revenues from  related party (notes 3 and 11)                                                            |       | 1,800                             |       | — |   |
|                                                                                                     |       |                              |       |   |   |
| **TOTAL  REVENUES**                                                                                      |       | 2,369                             |       | 704 |   |
| **COST OF  REVNEUES**                                                                                    |       |                              |       |   |   |
| Cost of products  sold                                                                                   |       | 318                               |       | 694 |   |
| Cost of products  sold, related party                                                                    |       | 1,492                             |       | — |   |
| Amortization of  technology (note 5)                                                                     |       | —                            |       | 92 |   |
| **Total  Cost of Revenues**                                                                              |       | 1,810                             |       | 786 |   |
| **GROSS  PROFIT (LOSS)**                                                                                 |       | 559                               |       | (82 | ) |
|                                                                                                     |       |                              |       |   |   |
| **OPERATING  EXPENSES (INCOME)**                                                                         |       |                              |       |   |   |
| Research and  development (including stock-based compensation expense of $217 and $27,  respectively)    |       | 2,461                             |       | 2,732 |   |
| Sales and  marketing (including stock-based compensation expense of $469 and $27,  respectively)         |       | 2,643                             |       | 2,687 |   |
| General and  administrative (including stock-based compensation expense of $1,281 and $0,  respectively) |       | 3,166                             |       | 1,476 |   |
| Restructuring  adjustments                                                                               |       | —                            |       | (315 | ) |
| Amortization of  intangible assets (note 5)                                                              |       | —                            |       | 417 |   |
|                                                                                                     |       |                              |       |   |   |
| **Total  Operating Expenses**                                                                            |       | 8,270                             |       | 6,997 |   |
| ** **                                                                                               |       |                              |       |   |   |
| **OPERATING  LOSS**                                                                                      |       | (7,711                            | )          | (7,079 | ) |
| **INTEREST  INCOME (EXPENSE), net**                                                                      |       | (269                              | )          | 76 |   |
|                                                                                                     |       |                              |       |   |   |
| **LOSS  FROM CONTINUING OPERATIONS**                                                                     |       | (7,980                            | )          | (7,003 | ) |
| **DISCONTINUED  OPERATIONS**                                                                             |       | —                            |       | 265 |   |
| **LOSS  FOR THE PERIOD**                                                                                 |       | $                                 | (7,980     | ) | $ | (6,738 | ) |
|                                                                                                     |       |                              |       |   |   |
|                                                                                                     |       |                              |       |   |   |
| **LOSS  PER SHARE**                                                                                      |       |                              |       |   |   |
| **Basic  and diluted:**                                                                                  |       |                              |       |   |   |
| Continuing  operations                                                                                   |       | $                                 | (0.50      | ) | $ | (0.46 | ) |
| Discontinued  operations                                                                                 |       | —                            |       | (0.02 | ) |
|                                                                                                     |       | $                                 | (0.50      | ) | $ | (0.44 | ) |
|                                                                                                     |       |                              |       |   |   |
| **WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING**                                                       |       |                              |       |   |   |
| Basic and  diluted                                                                                       |       | 15,859                            |       | 15,195 |   |

 

*Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements.*

 

2

----

 

**VyyoInc.**

**CondensedConsolidated Statements of Cash Flows**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                | ** ** | **Three Months Ended   March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                           | ** ** | **2005** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                  |       |                               |       |   |   |
| Loss for the period                                                       |       | $                                  | (7,980     | ) | $ | (6,738 | ) |
| Adjustments to reconcile loss to net cash used in  operating activities:  |       |                               |       |   |   |
| Income and  expenses not involving cash flows:                            |       |                               |       |   |   |
| Depreciation and  amortization                                            |       | 229                                |       | 761 |   |
| Accretion and  amortization of financing instruments, net                 |       | 365                                |       | — |   |
| Amortization and  charge related to stock-based compensation, net         |       | 1,981                              |       | (261 | ) |
| Changes in  assets and liabilities:                                       |       |                               |       |   |   |
| Accounts  receivable                                                      |       | 164                                |       | 313 |   |
| Other current  assets                                                     |       | (29                                | )          | (431 | ) |
| Inventory                                                                 |       | 987                                |       | (201 | ) |
| Accounts payable                                                          |       | (379                               | )          | (72 | ) |
| Accrued  liabilities                                                      |       | 274                                |       | (1,112 | ) |
| Liability for  employee rights upon retirement                            |       | 301                                |       | (14 | ) |
|                                                                      |       |                               |       |   |   |
| Net cash used in operating activities                                     |       | (4,087                             | )          | (7,755 | ) |
|                                                                      |       |                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                  |       |                               |       |   |   |
| Purchase of property and equipment                                        |       | (34                                | )          | (554 | ) |
| Purchase of short-term investments                                        |       | (1,000                             | )          | (9,076 | ) |
| Proceeds from sales and maturities of short-term  investments             |       | 4,739                              |       | 13,801 |   |
| Release (contributions) of severance pay funds                            |       | (31                                | )          | 33 |   |
|                                                                      |       |                               |       |   |   |
| Net cash provided by investing activities                                 |       | 3,674                              |       | 4,204 |   |
|                                                                      |       |                               |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                  |       |                               |       |   |   |
| Proceeds from exercise of stock options                                   |       | 1,054                              |       | 203 |   |
| Proceeds from issuance of common stock, senior  secured note, convertible |       |                               |       |   |   |
| note and  warrants, net of issuance cost                                  |       | 23,820                             |       | — |   |
| Proceeds from notes receivable from stockholders                          |       | —                             |       | 37 |   |
|                                                                      |       |                               |       |   |   |
| Net cash provided by financing activities                                 |       | 24,874                             |       | 240 |   |
|                                                                      |       |                               |       |   |   |
| Increase (decrease) in cash and cash equivalents                          |       | 24,461                             |       | (3,311 | ) |
| Cash and cash equivalents at beginning of period                          |       | 2,548                              |       | 5,512 |   |
|                                                                      |       |                               |       |   |   |
| Cash and cash equivalents at end of period                                |       | $                                  | 27,009     |   | $ | 2,201 |   |

 

*Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements.*

 

3

----

 

**VyyoInc.**

 

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.****             General Basis of Presentation**

 

The accompanyingunaudited condensed consolidated financial statements of Vyyo Inc. have beenprepared in accordance with generally accepted accounting principles in theUnited States (“GAAP”) for interim financial information and with theinstructions to the Quarterly Report on Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and notes requiredby GAAP for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals, reclassifications andadjustments) considered necessary for a fair presentation have been included.Operating results for the interim period are not necessarily indicative of theresults that may be expected for the full year. You should read these interimunaudited condensed consolidated financial statements in conjunction with theaudited consolidated financial statements in the Annual Report on Form 10-K forthe year ended December 31, 2005, filed by Vyyo Inc. with the Securities andExchange Commission (the “SEC”).

 

**Organizationand Principles of Consolidation**

 

The unaudited condensedconsolidated financial statements include the accounts of Vyyo Inc. and itswholly-owned subsidiaries (collectively, “Vyyo” or the “Company”). All materialinter-company balances and transactions have been eliminated in consolidation.

 

TheCompany provides cable and wireless broadband access solutions through twobusiness segments: the “Cable Solutions” segment and the “Wireless Solutions”segment. The Company’s products are designed to address four markets: Utility,Cable, Wireless Internet Service Providers (“WISP”) and Telecommunicationproviders. Although the Company is engaged to various degrees in these distinctmarkets, some of the Company’s core technologies overlap with its respectivesolutions.

 

TheCable Solutions segment includes products that are used to deliver telephonyand data T1/E1 links to enterprise and cellular providers over cable’s wirelessor hybrid-fiber coax (“HFC”) networks. Additionally, the Company’s “SpectrumOverlay” technology is used to expand cable operators’ typical HFC networkcapacity in the “last mile” by up to two times in the downstream and up to fourtimes in the upstream. The Company’s Cable Solutions segment includes theresults of operations of Xtend Networks Ltd., an Israeli company, and itswholly-owned, U.S.-based subsidiary, Xtend Networks Inc. (collectively,“Xtend”). The Company purchased all of the outstanding capital stock of Xtendon June 30, 2004 and consolidated its operations with the Company’s operationsbeginning July 1, 2004.

 

TheCompany’s Wireless Solutions segment includes utility products which enableutilities and other network service providers to operate private wirelessnetworks for communications, monitoring and Supervisory Control And Data Acquisition(“SCADA”) of their geographically disbursed, remote assets. Additionally, itincludes the Company’s WISP and telecommunications products which address theneeds of rural service providers to serve customers with wireless, high-speeddata beyond the reach of traditional terrestrial networks.

 

TheCompany is focused on promoting products in the Wireless Solutions segment intothe network provider, utility, petrochemical, municipality and enterprisemarkets. The Company’s Cable Solutions segment is focused on both promoting T1solutions for business services over cable networks and promoting cablebandwidth expansion solutions that are designed to expand cable operators’typical HFC network capacity.

 

**Summaryof Significant Accounting Principles**

 

***Financing***

 

On March 23, 2006,the Company closed the private placement of $25,000,000 of common stock, aConvertible Note, a Senior Secured Note and Warrants to purchase common stock toGoldman, Sachs & Co. This private placement resulted in estimated netproceeds to the Company of approximately $23,400,000. See note 8.

 

4

----

 

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

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates, judgments and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.

 

On an on-going basis,management evaluates its estimates, judgments and assumptions. Management basesits estimates, judgments and assumptions on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results could differ from these estimates, judgmentsand assumptions.

 

***Foreign Currency Transactions***

 

The U.S. dollar is thefunctional currency for the Company and all of its subsidiaries. All of theCompany’s sales are made in U.S. dollars. In addition, a substantial portion ofthe foreign subsidiaries’ costs are incurred in U.S. dollars. Since the U.S.dollar is the primary currency in the economic environment in which the foreignsubsidiaries operate, monetary accounts maintained in currencies other than theU.S. dollar (principally cash and liabilities) are remeasured into U.S. dollarsusing the representative foreign exchange rate at the balance sheet date.Operational accounts and nonmonetary balance sheet accounts are measured andrecorded at the rate in effect at the date of the transaction. The effects offoreign currency remeasurement are reported in current operations in theStatements of Operations under “Interest Income, net” and have not beenmaterial to date.

 

***Investments in Marketable Securities***

 

The Company’s investmentsin debt securities have been designated as available-for-sale.Available-for-sale securities are carried at fair value, which is determinedbased upon the quoted market prices of the securities, with unrealized gainsand losses reported in accumulated other comprehensive income (loss), a componentof stockholders’ equity, until realized. Realized gains and losses and declinesin value judged to be other-than-temporary on available-for-sale securities areincluded in the Statements of Operations as part of “Interest Income, net.” TheCompany views its available-for-sale portfolio as available for use in itscurrent operations. Accordingly, the Company has classified all investments asshort-term in the Statements of Operations under “Short-term investments,” eventhough the stated maturity date may be one year or more from the currentbalance sheet date. Interest, amortization of premiums, accretion of discountsand dividends on securities classified as available-for-sale are also includedin the Statements of Operations as part of “Interest Income, net.”

 

The Company recognizes animpairment charge when the decline in the fair values of these investmentsbelow their cost basis is deemed to be other-than-temporary. The Companyconsiders various factors in determining whether to recognize an impairmentcharge, including the length of time and the extent to which the fair value hasbeen below the cost basis, the current financial condition of the investee andthe Company’s intent and ability to hold the investment for a period of timesufficient to allow for any anticipated recovery in market value. The Companyrecognized an other-than-temporary impairment in its available-for-salesecurities of $(42,000) and $112,000 and realized losses of $31,000 and $0 forthe three months ended March 31, 2006 and 2005, respectively.

 

***Cash Equivalents***

 

Cash equivalents areshort-term, highly-liquid investments and deposits that have originalmaturities of three months or less at the time of investment and that arereadily convertible to cash.

 

***Inventory***

 

Inventory is stated atthe lower of cost or market, where cost includes material and labor. TheCompany regularly monitors inventory quantities on hand and records a provisionfor excess and obsolete inventory based primarily on the Company’s estimatedforecast of future product demand and production requirements. Although the

 

5

----

 

Company makes everyeffort to ensure the accuracy of its forecasts of future product demand, anysignificant unanticipated changes in demand or technological developments wouldsignificantly impact the value of the inventory and the reported operatingresults. If actual market conditions are different than the Company’sassumptions, additional provisions may be required. The Company’s estimates offuture product demand may prove to be inaccurate, in which case the Company mayhave understated or overstated the provision required for excess and obsoleteinventory. In the future, if the inventory is determined to be overvalued, theCompany would be required to recognize such costs in its cost of sales at thetime of such determination. If the Company’s inventory is determined to beundervalued, 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 months ended March31, 2006 and 2005, the Company did not write-down any inventory.

 

***Fair Value of Financial Instruments***

 

The fair value of thefinancial instruments included in the Company’s working capital approximatescarrying value. The Promissory Note, Senior Secured Note and Convertible Noteare presented in the Balance Sheets as “Long-Term Liabilities,” at theirestimated fair value.

 

***Property and Equipment***

 

Property and equipmentare stated at cost less accumulated depreciation and amortization. Depreciationand amortization are provided using the straight-line method over the estimateduseful lives of the assets.

 

Leasehold improvementsare amortized over the shorter of the lease term or the estimated useful lifeof the related asset.

 

***Intangible Assets***

 

During 2005, the Companyrecorded an impairment charge of $11,388,000 for the full remaining carryingvalue of its intangible assets. In 2005, the Company’s intangible assets relatedto the acquisition of Xtend and consisted of technology, non-competitionagreements, an exclusive sales agreement and workforce. These definite-lifeintangible assets were amortized using the straight-line method over theirestimated useful lives, ranging between one and six years. See also note 5.

 

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

 

Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS No. 144”), requires that long-livedassets, including definite life intangible assets to be held and used ordisposed of by an entity, be reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of the assets may not berecoverable. Under SFAS No. 144, if the sum of the expected future cashflows (undiscounted and without interest charges) of the long-lived assets isless than the carrying amount, the Company would recognize an impairment lossand would write down the assets to their estimated fair values. See also note5.

 

***Revenue Recognition***

 

Revenues from sales ofproducts and supplies are recognized when an arrangement exists, delivery hasoccurred and title has passed to the customer, the Company’s price to thecustomer is fixed or determinable and collectability is reasonably assured.When sales transactions include more then one deliverable (unit of accounting)sold, the Company follows the guidance of Emerging Issues Task Force (“EITF”)Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” and StaffAccounting Bulletin (“SAB”) 104, “Revenue Recognition.” Under the provisions inthese statements, the Company separates the different units of accounting insales with multiple deliverables based on the objective and reliable evidenceof fair value of the different elements. Revenue for each unit of accounting isthen recognized when products are delivered or when services are rendered orratably over the contractual period, depending on the nature of thedeliverable.

 

The Company’s productsare generally off-the-shelf products, sold “as is,” without further adjustmentor installation. Sales contracts with distributors stipulate fixed prices andcurrent payment terms and are not subject to the distributor’s resale or any othercontingencies. Accordingly, when all criteria above are met, sales of finishedproducts to distributors are recognized as revenue upon delivery and aftertitle and risk pass to the distributors.

 

The Company does notgrant any rights of return or cancellation to any of its customers.

 

6

----

 

In contracts where thereis a customer acceptance provision or there is uncertainty about customeracceptance, the Company defers the associated revenue until it has evidence ofcustomer acceptance. The Company performs ongoing credit evaluations of itscustomers’ financial condition and in some cases requires various forms ofsecurity.

 

***Product Warranty***

 

The Company provides forproduct warranty costs when it recognizes revenue from sales of its products. Theprovision is calculated as a percentage of sales, based on historicalexperience.

 

***Research and Development Costs***

 

Research and developmentcosts are expensed as incurred and consist primarily of personnel, facilities,equipment and supplies for research and development activities. Grants receivedfrom the Office of the Chief Scientist at the Ministry of Industry and Trade inIsrael and other research foundations are deducted from research anddevelopment expenses as the related costs are incurred.

 

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

 

Basic and diluted lossper share are calculated and presented in accordance with SFAS No. 128,“Earnings per share” (“SFAS 128”). For the three months ended March 31, 2006and 2005, the following have been excluded from the calculation of the dilutedloss per share because all such securities are anti-dilutive for the presentedperiods: 6,575,000 and 5,763,100 outstanding stock options, 75,000 and 75,000shares of restricted stock and 79,559 and 0 warrants to purchase shares ofcommon stock, respectively.

 

***Employee Stock-Based Compensation***

 

Until December 31, 2005,the Company accounted for employee stock-based compensation in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees” (“APB No. 25”), and related interpretations. Chargesfor stock-based compensation represent the amortization of deferredcompensation charges, which are based on aggregate differences between therespective exercise price of stock options, shares of restricted stock andpurchase price of the underlying common stock on one hand versus the fairmarket value of the common stock on the other hand. Deferred stock-basedcompensation is amortized over the vesting period of the underlying stockoptions and the shares of restricted stock.

 

Under “fixed plan”accounting, compensation cost is fixed, measured at grant date and is notsubsequently adjusted. Under “variable plan” accounting, the measurement dateoccurs after the grant date and compensation cost is estimated and recordedeach period from the grant date to the measurement date, based on thedifference between the option price and the fair market value of the underlyingcommon stock at the end of each period.

 

As of January 1, 2006,the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS123(R)”), using the modified prospective method. This new standard requiresmeasurement of stock-based compensation cost for all stock-based awards at thefair value on the grant date and recognition of stock-based compensation overthe service period for awards that the Company expects will vest. The fairvalue of stock options is determined based on the number of shares granted andthe price of the Company’s common stock, and calculated based on theBlack-Scholes and the binomial valuation models, which is consistent with theCompany’s valuation techniques previously utilized for options in footnotedisclosures required under SFAS No. 123, “Accounting for Stock BasedCompensation,” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure.” The Company recognizes such value asexpense over the service period, net of estimated forfeitures, using theaccelerated method under SFAS 123(R). Due to its adoption of SFAS 123(R), theCompany no longer has employee stock-based compensation awards subject tovariable accounting treatment. The cumulative effect of the Company’s adoptionof SFAS 123(R), as of January 1, 2006, was not material.

 

The fair value of eachstock option granted during the three months ended March 31, 2006 and 2005 wasestimated at the date of grant using the Black-Scholes and the binomialvaluation models, using the following assumptions:

 

7

----

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Black-Scholes model assumptions:      |       |                              |       |   |   |
| Risk-free  interest rates ranges      |       | 4.66%-4.74%                       |       | 3.35%-4.50% |   |
| Weighted-average  expected life range |       | 2.5-5.0                           |       | 2.5 |   |
| Volatility  ranges                    |       | 0.62-0.76                         |       | 0.73 |   |
| Dividend yields                       |       | —                            |       | — |   |
|                                  |       |                              |       |   |   |
| Binomial valuation model assumptions: |       |                              |       |   |   |
| Risk-free  interest rates ranges      |       | 4.20%-4.60%                       |       | — |   |
| Weighted-average  expected life range |       | 0.08-8.42                         |       | — |   |
| Volatility  ranges                    |       | 0.61-0.63                         |       | — |   |
| Dividend yields                       |       | —                            |       | — |   |

 

The Company’s pro formainformation for the three months ended March 31, 2005 is as follow:

 
| ** **                                                                                          | ** ** | **(In thousands,**         | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                          | ** ** | **except per share data)** | ** ** |
| Loss from continuing operations as reported                                                         |       | $                          | (7,003     | ) |
| Add: stock-based employee compensation income  included in reported loss                            |       | (261                       | )          |
| Add: stock-based  employee compensation expense determined under fair value method for all  awards  |       | (1,364                     | )          |
| Pro forma loss from continuing operations                                                           |       | $                          | (8,628     | ) |
| Income from discontinued operations as reported                                                     |       | $                          | 265        |   |
| Add: stock-based  employee compensation expenses determined under fair value method for all  awards |       | —                     |       |
| Pro forma income from discontinued operations                                                       |       | $                          | 265        |   |
| Pro forma loss for the period                                                                       |       | $                          | (8,363     | ) |
|                                                                                                |       |                       |       |
| Basic and diluted loss per share:                                                                   |       |                       |       |
| As reported:                                                                                        |       |                       |       |
| Continuing  operations                                                                              |       | $                          | (0.46      | ) |
| Discontinued  operations                                                                            |       | 0.02                       |       |
| Loss                                                                                                |       | $                          | (0.44      | ) |
|                                                                                                |       |                       |       |
| Pro forma:                                                                                          |       |                       |       |
| Continuing  operations                                                                              |       | $                          | (0.57      | ) |
| Discontinued  operations                                                                            |       | 0.02                       |       |
| Loss                                                                                                |       | $                          | (0.55      | ) |

 

***Recent Accounting Pronouncements***

 

In February 2006,FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”), and SFASNo. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” (“SFAS 140”). SFAS 155 simplifies theaccounting for certain derivatives embedded in other financial instruments byallowing them to be accounted for as a whole if the holder elects to accountfor the whole instrument on a fair value basis. SFAS 155 also clarifies andamends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effectivefor all financial instruments acquired, issued or subject to a remeasurementevent occurring in fiscal years beginning after September 15, 2006. TheCompany does not expect adoption of SFAS 155 to have a material impact on itsconsolidated financial position, results ofoperations or cash flows.

 

8

----

 

***Reclassifications***

 

Certain amounts in the2005 financial statements have been reclassified to conform to the 2006presentation.

 

**2.****             Inventory**

 

Inventory is comprised ofthe following:

 
| ** **      | ** ** | **March 31,**      | ** **   | **December 31,** | ** ** |
|-----------------|------------|--------------------|--------------|------------------|------------|
| ** **      | ** ** | **2006**           | ** **   | **2005**         | ** ** |
| ** **      | ** ** | **(In thousands)** | *** *** |
| Raw materials   |       | $                  | 510          |             | $          | 488 |   |
| Work in process |       | 219                |         | 415              |       |
| Finished goods  |       | 775                |         | 1,588            |       |
|            |       |               |         |             |       |
|            |       | $                  | 1,504        |             | $          | 2,491 |   |

 

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

 

On March 31, 2006, theCompany entered into an Equipment Purchase Agreement (the “Purchase Agreement”)with Arcadian Networks, Inc. (“ANI”). Davidi Gilo, the Company’s ChiefExecutive Officer and Chairman of the Board of Directors, 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.

 

Pursuant to the PurchaseAgreement, the Company will sell certain of its products and services to ANIover a 10-year term. The Company will distribute these products to ANI on anexclusive basis in the United States, Canada and the Gulf of Mexico (the“Relevant Territory”) to identified markets if: (a) ANI makes two paymentsof $4,000,000 during the first two years of the Purchase Agreement; (b) ANImeets specified annual minimum product purchase amounts; and (c) ANI’soutstanding balances are below specified amounts.

 

Exclusivity after thesecond year will depend on ANI’s meeting the minimum purchase amounts. Inaddition, to maintain its exclusivity rights in the Purchase Agreement, ANImust purchase at least 25% of its minimum product purchase amounts within thefirst six months of any given year, and at least 32% within the first sixmonths of any given year if ANI purchases from third parties more than 15% ofproducts with similar functionality to the products covered by the PurchaseAgreement.

 

The Purchase Agreementfixes the product prices for the first two years, after which time prices aresubject to adjustment according to the amount of product purchased by ANIcompared to specified forecasted purchase amounts.

 

The Purchase Agreementdoes not prohibit the Company from selling any of its products or services toareas outside of the Relevant Territory. In addition, the Company may sell itsproducts within the Relevant Territory to end users or resellers other thanthose engaged in the following markets: (a) electricity generation,transmission or distribution (both downstream and upstream); (b) oil or gasexploration, manufacture, transportation or distribution; (c) water utility;(d) chemical manufacture; (e) mining; (f) environmental monitoring orprotection; (g) transportation facilities (including railroads); (h) bordercontrol; and (i) public safety. Specifically, the Company may sell its productsin the Relevant Territory to cable television customers.

 

The Company received thefirst exclusivity payment of $4,000,000 on April 3, 2006 and an initialpurchase order for $10,000,000 on March 31, 2006, which satisfies ANI’srequirements for exclusivity in the first year of the Purchase Agreement.

 

For the three monthsended March 31, 2006, the Company recognized revenue of $1,800,000 under thePurchase Agreement. The Company will recognize the exclusivity payments fromANI over the 10-year term of the Purchase Agreement.

 

9

----

 

**4.****             Promissory Note Issued in Connection withAcquisition of Xtend**

 

On June 30, 2004, theCompany acquired all of the outstanding shares of Xtend. In connection with theacquisition, the Company issued 1,398,777 shares of its common stock valued at$8,492,000, and made cash payments of approximately $2,970,000 fornon-competition agreements with certain Xtend employees. In addition, theCompany provided a promissory note in the principal amount of $6,500,000originally payable on March 31, 2007 (the “Promissory Note”). OnDecember 16, 2005, the Company amended key provisions of the PromissoryNote as follows:

 

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

 

•      the provisionthat would have allowed the holder to accelerate the 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 onDecember 31, 2005 or June 30, 2006 was waived;

 

•      The PromissoryNote will be cancelled if:

 

(a)           theCompany’s revenue (including that of all subsidiaries, except fornewly-acquired businesses) equals or exceeds $60,000,000 and gross marginequals or exceeds 35%, for either of the fiscal years ending December 31,2006 or December 31, 2007;

 

(b)           beginningon the first day that the Company’s common stock closes at or above $18.00 pershare and at any time thereafter, the holder sells all of its Remaining Sharesat an average sales price at or above $18.00 per share. “Remaining Shares”means those shares of the Company’s common stock received by the holder in theXtend acquisition;

 

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

 

(d)           theholder receives a bona fide offer for the purchase of all of the RemainingShares at an average sales price at or above $18.00 per share. A “bona fide”offer means a fully funded and unconditional offer for purchase by a buyer whohas provable and sufficient financial resources to purchase all of theRemaining Shares for cash within a commercially reasonable period of time fromthe date of offer, not to exceed 30 days.

 

As security for theamended Promissory Note, the Company delivered to the holder a $5,000,000letter of credit whereby the Company deposited this $5,000,000 with a bank, andagreed to restrictions on the deposit. This deposit is reflected in the BalanceSheets as “Restricted cash.” The letter of credit will be cancelled if any timeafter June 30, 2006, for 45 consecutive trading days, all of the followingconditions exist: (a) the weighted average trading price of the Company’scommon stock is equal to or higher than $18.00 per share; (b) the averagedaily trading volume of the Company’s common stock is higher than 150,000shares per day; and (c) the holder is lawfully able to sell publicly inone transaction or in a series of transactions, during such 45 consecutivetrading days, all of its shares of the Company’s common stock withoutregistration under the Securities Act of 1933, as amended. If the Company’sconsolidated revenues in the year ended December 31, 2006 equal or exceed$60,000,000 and the Company’s consolidated gross margin equals or exceeds 35%during the same period, the Promissory Note will be canceled.

 

The Company determinedthat, as of the time it amended the Promissory Note and immediately prior toits amendment, the contingency had been resolved and, therefore, the Companyrecorded $6,500,000 as additional consideration paid in the Xtend acquisition.This resulted in an increase to the intangible assets acquired. Following animpairment test performed on the intangible assets, the assets were immediatelyimpaired as discussed in note 5. In addition, the Company estimated thefair value of the amended Promissory Note at approximately $3,967,000 andrecorded this amount in its Balance Sheets as a long-term liability under“Promissory note.” The Company recorded a $2,533,000 difference between thevalue of the amended Promissory Note and the original Promissory Note as “GainResulting from Amendment to Promissory Note” in its Statements of Operationsfor the year ended December 31, 2005. Increases in the value of the amendedPromissory Note will be recorded as interest expenses up to $2,533,000 duringthe remaining term of the Promissory Note unless it is cancelled as describedabove. For the three months ended March 31, 2006, the Company recorded anincrease of $317,000 in interest expenses related to the amended PromissoryNote.

 

10

----

 

**5.****             IntangibleAssets, net**

 

The Company’s currentfocus is on the residential market for cable television multi-system operators(“MSOs”), rather then the commercial market for MSOs, the Company’s prior focusat the time of the Xtend acquisition. This change in focus will require theCompany to invest additional efforts in the development of suitable technologyand products. Given this change in focus, and in conjunction with the Company’songoing review of the carrying value of its intangible assets, the Company’smanagement determined in December 2005 that, in accordance with SFAS No. 144,an impairment test of intangible assets was required.

 

The fair value of theintangible assets was estimated by management with the assistance of anindependent third party appraiser, based upon future expected discountedcash-flows as of December 31, 2005. Based on this appraisal, by using aweighted discounted cash flow model for the estimation of a fair value of groupof assets, as set forth in SFAS No. 144, together with other facts andcircumstances, the Company’s management decided to record an impairment chargeof $11,388,000 relating to the full remaining carrying value of the intangibleassets as of December 31, 2005.

 

Amortization ofintangible assets acquired for the three months ended March 31, 2005 was$509,000, consisting of the amortization of existing technology (classified inthe Statements of Operations as “Cost of Revenues”), of $92,000,non-competition agreements of $220,000, an exclusive sales agreement of$135,000 and workforce of $62,000. The Company did not amortize intangibleassets during the three months ended March 31, 2006.

 

In 2005, intangible assetswere amortized using the straight-line method over their estimated useful livesas follows: existing technology over six years; non-competition agreements overapproximately three years; an exclusive sales agreement over four and a halfyears; and workforce over one year.

 

**6.****             Accrued Liabilities**

 

Accrued liabilitiesconsist of the following:

 
| ** **                    | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                    | ** ** | **2006**           | ** ** | **2005**         | ** ** |
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Withholding tax               |       | $                  | 2,975      |             | $          | 2,582 |   |
| Compensation and benefits     |       | 1,581              |       | 1,812            |       |
| Royalties                     |       | 931                |       | 930              |       |
| Warranty*                     |       | 123                |       | 104              |       |
| Legal and professional fees   |       | 395                |       | 28               |       |
| Payment received from insurer |       | 200                |       | —           |       |
| Deferred income               |       | 58                 |       | —           |       |
| Other                         |       | 819                |       | 935              |       |
|                          |       | $                  | 7,082      |             | $          | 6,391 |   |

 

----

* The changes in thewarranty balances consist of the following:

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                    |       | **(In thousands)**                |       |
| Balance at beginning of period                |       | $                                 | 104        |   | $ | 389 |   |
| Product warranty issued for new sales         |       | 48                                |       | 380 |   |
| Changes in accrual of warranty periods ending |       | (29                               | )          | (343 | ) |
| Balance at end of period                      |       | $                                 | 123        |   | $ | 426 |   |

 

11

----

 

**7.****             Severance Liabilities**

 

The amounts paid relatedto severance and severance expenses were:

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(In thousands)**                | ** ** |
| Amounts paid related to severance |       | $                                 | 174        |   | $ | 144 |   |
|                              |       |                              |       |   |   |
| Severance expenses*               |       | $                                 | 397        |   | $ | 174 |   |

 

----

* With respect to theCompany’s Israeli employees, the Company expects to contribute $157,000 to adefined contribution plan and $111,000 to insurance and pension plans for theyear ended December 31, 2006 (includes amounts contributed in the three monthsended March 31, 2006).

 

**8.****             Financing**

 

OnMarch 18, 2006, the Company entered into a Securities Purchase Agreement (the“Financing Agreement”) for the private placement of $25,000,000 of commonstock, a Convertible Note, a Senior Secured Note and Warrants to purchasecommon stock to Goldman, Sachs & Co. (the “Financing”). In theFinancing, the Company issued (a) 1,353,365 shares of common stock,(b) a $10,000,000 10% Convertible Note, (c) a $7,500,000 9.5% SeniorSecured Note, and (d) Warrants to purchase 298,617 shares of common stock.The transaction resulted in estimated net proceeds to the Company ofapproximately $23,400,000. The transactions contemplated by the FinancingAgreement closed on March 23, 2006.

 

TheConvertible Note matures on March 22, 2011 and accrues interest at a rateof 10% per annum, payable in cash quarterly in arrears, and is convertible atthe holder’s option into shares of common stock at a conversion price of $10.00per share, subject to adjustment. In the event of a Fundamental Transaction (asdefined in the Convertible Note), the holder may, at its option, require theCompany to redeem all or any portion of the Convertible Note at a price equalto 101% of the principal amount, plus all accrued and unpaid interest, if any,and subject to specified conditions, may be entitled to a “make-whole” premiumcalculated in accordance with the terms of the Convertible Note. Any default inthe payment of interest or principal will result in an increase in the interestrate by an additional 2% until the default is cured. In addition, holders ofmore than one-third of the aggregate principal balance then outstanding maydeclare all outstanding amounts immediately due and payable upon the occurrenceof any event of default. The Convertible Note is unsecured and subordinate tothe Company’s senior indebtedness.

 

TheSenior Secured Note matures on March 22, 2011 and accrues interest at arate of 9.5% per annum. The entire principal amount plus all accrued interestis payable at maturity, unless earlier redeemed or repurchased. The Company hasthe option to prepay the Senior Secured Note in whole or in part, beginningMarch 22, 2007, subject to payment of an applicable premium. In the eventof a Fundamental Transaction (as defined in the Senior Secured Note), theholder may require that the Company redeem the entire Senior Secured Note at aprice equal to 101% of the principal amount, plus all accrued and unpaidinterest. Any default in the payment of interest or principal will result in anincrease in the interest rate by an additional 2% until the default is cured.In addition, holders of more than one-third of the aggregate principal balancethen outstanding may declare all outstanding amounts immediately due andpayable upon the occurrence of any event of default. In connection with theSenior Secured Note, the Company also issued a Warrant exercisable for 298,617shares of common stock at an exercise price of $0.10 per share, to expire onMarch 22, 2011. Goldman, Sachs & Co. exercised this Warrant onMarch 24, 2006. The Senior Secured Note is a senior secured obligation ofthe Company and is secured by the Company’s assets and the intellectualproperty of certain of its subsidiaries, as set forth in the Guaranty andSecurity Agreement.

 

12

----

 

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

 
| ** **                                                               | ** ** | ** **     | ** ** | **Relative fair** | ** ** |
|--------------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|
| ** **                                                               | ** ** | **Face value** | ** ** | **value**         | ** ** |
| 1,353,365 shares of common stock                                         |       | $              | 7,500,000  |              | $          | 8,260,000 |   |
| 10% Convertible Note due March 22, 2011                                  |       | 10,000,000     |       | 10,111,000        |       |
| 9.5% Senior Secured Note due March 22, 2011                              |       | 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 Financing                               |       | $              | 25,000,000 |              | $          | 25,000,000 |   |

 

TheSenior Secured Note and the Convertible Note will be accreted by up to$2,559,000 to their face values of $7,500,000 and $10,000,000, respectively,through their five-year term until maturity. The accretion will be recorded as interestexpense.

 

Theestimated issuance costs of the Financing were approximately $1,993,000including (a) a $1,210,000 payment and issuance of warrants to purchase 79,559shares 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 financialadvisor and (b) accrual of approximately $417,000 for legal and otherprofessional fees and costs. Of these estimated issuance costs, $806,000 and$385,000 were allocated to the Convertible Note and the Senior Secured Note,respectively. These costs will be amortized based on the effective interestamortization method through the five-year term until maturity of the notes andrecorded as interest expense, based on the effective interest method ofamortization.

 

The issuance costsdescribed above were allocated to the different instruments based on their relativefair values.

 

**9.****             Stock-Based Compensation**

 

**CommonStock Reserved for Issuance**

 

As of March 31, 2006, theCompany reserved approximately 514,400 shares of common stock for issuance,upon exercise of stock options and issuance of shares of restricted stockreserved under its stock-based compensation plans.

 

**StockOption Plans**

 

The Company has thefollowing stock option plans: the 1999 Employee and Consultant Equity IncentivePlan and the Third Amended and Restated 2000 Employee and Consultant Equity IncentivePlan (the “2000 Plan”). The Company’s 1996 Equity Incentive Plan expired by itsterms as of February 3, 2006. The Company currently makes grants only from the2000 Plan, which permits the grant of incentive stock options (“ISOs”) toemployees, nonstatutory stock options to employees, directors and consultantsand stock options which comply with Israeli law if granted to persons who aresubject to Israel income tax. The 2000 Plan also provides for the awards ofrestricted stock and stock bonuses.

 

ISOs must have anexercise price equal to the fair value of the common stock on the grant date asdetermined by the Board of Directors. The period within which the option may beexercised is determined at the time of grant, but may not be longer than 10 years.The number of shares reserved under the 2000 Plan is subject to automaticannual increases on the first day of each fiscal year, equal to the lesser of1,000,000 shares or 10% of the number of outstanding shares on the last day ofthe immediately preceding year.

 

On November 1, 2004, theCompany entered into an at-will employment agreement with Xtend’s former chiefexecutive officer under which he was granted an option to purchase 300,000shares of the Company’s common stock. In January 2005, he also was granted anoption to purchase 400,000 shares of the Company’s common stock. Nocompensation expense was recorded for these options as the fair value of thestock was not greater than the

 

13

----

 

exercise price. EffectiveOctober 31, 2005, the employment of this officer was terminated, and 25% of hisoutstanding options (175,000) were immediately vested. All remainingoutstanding options were forfeited.

 

In August 2005, theCompany granted certain employees options to purchase 145,000 shares of theCompany’s common stock at an exercise price of $0.10 per share. The marketprice on the date of grant was $6.75, which resulted in deferred stockcompensation of $964,000 which was amortized during the year ended December 31,2005 by $222,000. Fifty percent of these options are scheduled to vest onDecember 10, 2006 with the remaining vesting on December 10, 2007.

 

In March 2005, theCompany granted its Chairman of the Board and Chief Executive Officer andcertain executives 630,000 options to purchase shares of common stock for $7.50to $10.50 per share. The options vest and become exercisable if the closingprice of the Company’s common stock is at or above specified prices for 10trading days out of any 30 consecutive trading days, so long as the optioneeremains an employee of or consultant to the Company on the 10th day of theperiod. The options expire five years after the grant date, or, if earlier, 90days after the optionee is no longer an employee of or consultant to theCompany. As of March 31, 2006, 75,000 of these stock options were forfeited. Inthe three months ended March 31, 2006, the Company recorded expenses of$117,000 related to these stock options.

 

The cumulative effect ofthe Company’s adoption of SFAS 123(R), as of January 1, 2006, was not material.

 

**RestrictedStock**

 

Recipients of shares ofrestricted stock are entitled to cash dividends, to the extent paid, and tovote their shares throughout the restricted period. The shares are valued atthe market price on the grant date, and compensation is amortized ratably overthe vesting period. The Company must recognize compensation expenses for sharesof restricted stock subject to designated performance criteria if theperformance criteria are being attained or it is probable that they will beattained.

 

In July 2004, the Companygranted a former Xtend employee 146,000 shares of restricted stock, of which71,000 shares have vested and 75,000 shares will vest subject to designatedperformance criteria. For the three months ended March 31, 2006, the Companydid not record compensation expenses since the Company does not expect thatperformance conditions related to the remaining restricted stock will beachieved.

 

**Grantof Stock Options to Davidi Gilo**

 

On February 10,2006, the Company’s Compensation Committee approved the grant to Mr. Giloof options to purchase 900,000 shares of the Company’s common stock. Theseoptions vest as follows:

 

(a)      300,000 sharesvested upon the closing of the 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 recordedstock-based compensation expenses of $750,000 related to the 300,000 optionsgranted to Mr. Gilo that vested upon the closing of the Financing. The Companyalso recorded stock-based compensation expenses of $30,000 in connection withthe 600,000 stock options granted to Mr. Gilo which vest based on the closingprice of the Company’s common stock. These stock-based compensation expenseswere calculated based on the binomial valuation method.

 

14

----

 

A summary of stock optionplans, shares of restricted stock and related information, under all of theCompany’s equity incentive plans for the year ended December 31, 2005 andthe three months ended March 31, 2006 are as follows (in thousands, except pershare data):

 
| ** **                 | ** ** | ** **         | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** **     | ** ** |
|----------------------------|------------|--------------------|------------|-----------------|------------|--------------|------------|----------------|------------|
| ** **                 | ** ** | **Options/Shares** | ** ** | ** **      | ** ** | **average**  | ** ** | **Weighted**   | ** ** |
| ** **                 | ** ** | **available**      | ** ** | **Number**      | ** ** | **exercise** | ** ** | **average**    | ** ** |
| ** **                 | ** ** | **for grants**     | ** ** | **outstanding** | ** ** | **price**    | ** ** | **fair value** | ** ** |
| Balance at January 1, 2006 |       | 839                |       | 5,585           |       | 5.35         |       | —         |       |
| Authorized                 |       | 1,000              |       | —          |       | —       |       | —         |       |
| Granted*                   |       | (1,407             | )          | 1,407           |       | 5.62         |       | 3.18           |       |
| Exercised                  |       | —             |       | (286            | )          | 3.68         |       | —         |       |
| Expired plans              |       | (39                | )          | —          |       | —       |       | —         |       |
| Cancelled                  |       | 121                |       | (131            | )          | 7.77         |       | —         |       |
| Balance at March 31, 2006  |       | 514                |       | 6,575           |       | 5.43         |       | —         |       |

 

----

*      Includes23,125 options granted to non-employee directors in the three months endedMarch 31, 2006.

 

The following tablesummarizes information concerning outstanding and exercisable options understock option plans as of March 31, 2006:

 
| ** **             | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **             | ** ** | ** **              | ** ** | **Weighted**            | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **             | ** ** | ** **              | ** ** | **average**             | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **             | ** ** | ** **              | ** ** | **remaining**           | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| **Range  of exercise** | ** ** | **Number**              | ** ** | **contractual**         | ** ** | **price per** | ** ** | **Number** | ** ** | **price per** | ** ** |
| **prices**             | ** ** | **outstanding**         | ** ** | **life**                | ** ** | **Share** | ** ** | **exercisable** | ** ** | **share** | ** ** |
| ** **             | ** ** | **(In thousands)**      | ** ** | **(In years)**          | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Plans:                 |       |                    |       |                    |       |   |   |   |   |   |   |
| 0.10                   |       | 145                     |       | 4.36                    |       | $ | 0.10 |   | — |   | — |   |
| 0.99                   |       | 3                       |       | 1.92                    |       | 0.99 |   | 3 |   | $ | 0.99 |   |
| 2.27-3.40              |       | 911                     |       | 1.73                    |       | 3.18 |   | 810 |   | 3.16 |   |
| 3.57-5.22              |       | 2,713                   |       | 5.42                    |       | 4.66 |   | 1,221 |   | 4.41 |   |
| 5.60-8.39              |       | 2,607                   |       | 4.22                    |       | 7.02 |   | 799 |   | 6.80 |   |
| 8.43-10.50             |       | 196                     |       | 3.62                    |       | 9.41 |   | 44 |   | 9.07 |   |
|                   |       | 6,575                   |       | 4.35                    |       | $ | 5.43 |   | 2,877 |   | $ | 4.79 |   |

 

**10.****          Comprehensive Loss**

 

The components ofcomprehensive loss are as follows:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                | ** ** |
| Loss                                             |       | $                                 | (7,980     | ) | $ | (6,738 | ) |
| Unrealized loss on available-for-sale securities |       | —                            |       | (24 | ) |
| Comprehensive loss                               |       | $                                 | (7,980     | ) | $ | (6,762 | ) |

 

15

----

 

**11.****          Segment Reporting**

 

Following the acquisitionof Xtend, the Company’s business is divided into two segments: “WirelessSolutions” and “Cable Solutions.”

 
| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                | ** ** |
| Consolidated revenues from:                                   |       |                              |       |   |   |
| Wireless  Solutions, related party                            |       | $                                 | 1,800      |   | — |   |
| Wireless  Solutions                                           |       | 141                               |       | $ | 704 |   |
| Cable Solutions                                               |       | 428                               |       | — |   |
| Consolidated  revenues                                        |       | $                                 | 2,369      |   | $ | 704 |   |
|                                                          |       |                              |       |   |   |
| Operating loss from continuing operations:                    |       |                              |       |   |   |
| Wireless  Solutions                                           |       | $                                 | 5,021      |   | $ | 3,538 |   |
| Cable Solutions                                               |       | 2,690                             |       | 3,541 |   |
|                                                          |       |                              |       |   |   |
| Total  consolidated operating loss from continuing operations |       | 7,711                             |       | 7,079 |   |
| Interest income  expenses (income), net                       |       | 2,690                             |       | (76 | ) |
| Loss from  continuing operations                              |       | $                                 | 7,980      |   | $ | 7,003 |   |

 

The following providesinformation on the Company’s assets :

 
| ** **         | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------|------------|--------------------|------------|------------------|------------|
| ** **         | ** ** | **2006**           | ** ** | **2005**         | ** ** |
| ** **         | ** ** | **(In thousands)** | ** ** |
| ** **         | ** ** | ** **         | ** ** | ** **       | ** ** |
| Wireless Solutions |       | $                  | 37,466     |             | $          | 19,935 |   |
| Cable Solutions    |       | 3,765              |       | 1,860            |       |
|               |       | $                  | 41,231     |             | $          | 21,795 |   |

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**                | ** ** |
| Expenditures for long-lived assets: |       |                              |       |   |   |
| Wireless Solutions                  |       | $                                 | 18         |   | $ | 43 |   |
| Cable Solutions                     |       | 17                                |       | 511 |   |
|                                |       | $                                 | 35         |   | $ | 554 |   |

 
| Depreciation and  amortization expenses: |   |   |   |   |   |
|------------------------------------------|--------|--------|--------|--------|--------|
| Wireless  Solutions                      |   | $      | 114    |   | $      | 164 |   |
|                                     |   |   |   |   |   |
| Cable Solutions:                         |   |   |   |   |   |
| Intangible  assets                       |   | — |   | 509    |   |
| Other assets                             |   | 115    |   | 88     |   |
|                                     |   | 115    |   | 597    |   |
|                                     |   | $      | 229    |   | $      | 761 |   |

 

16

----

 

The following is asummary of operations within geographic areas based on the location of thecustomers:

 
| ** **                                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**                | ** ** |
| Revenues from  sales to affiliated and unaffiliated customers from continuing operations in  the: |       |                              |       |   |   |
| Wireless Solutions segment:                                                                       |       |                              |       |   |   |
| North America,  related party                                                                     |       | $                                 | 1,800      |   | — |   |
| North America                                                                                     |       | 130                               |       | $ | 357 |   |
| Asia                                                                                              |       | —                            |       | 301 |   |
| Rest of the  world                                                                                |       | 11                                |       | 46 |   |
|                                                                                              |       | $                                 | 1,941      |   | $ | 704 |   |
|                                                                                              |       |                              |       |   |   |
| Cable Solutions segment:                                                                          |       |                              |       |   |   |
| North America                                                                                     |       | $                                 | 428        |   | — |   |
|                                                                                              |       | $                                 | 428        |   | — |   |

 
| ** **                  | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|--------------------|------------|------------------|------------|
| ** **                  | ** ** | **2006**           | ** ** | **2005**         | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Property and equipment, net |       |               |       |             |       |
| Israel                      |       | $                  | 1,208      |             | $          | 1,378 |   |
| United States               |       | 182                |       | 207              |       |
|                        |       | $                  | 1,390      |             | $          | 1,585 |   |

 

Sales to major customersout of total revenues are as follows:

 
| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Customer A |       | 76                                | %          | — |   |
| Customer B |       | 18                                | %          | — |   |
| Customer C |       | 1                                 | %          | 25 | % |
| Customer D |       | 1                                 | %          | 22 | % |
| Customer E |       | —                            |       | 24 | % |
| Customer F |       | —                            |       | 23 | % |

 

17

----

 

**Item2.****                    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

You should read thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in conjunction with our condensed consolidated financial statementsand accompanying notes appearing elsewhere in this Quarterly Report on Form10-Q. The matters addressed in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, with the exception of thehistorical information presented, contain forward-looking statements involvingrisks and uncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of certain factors,including those set forth in Item 1A below and elsewhere in this report.

 

## **Overview**

## ** **

We provide cable andwireless broadband access solutions through two business segments: the “CableSolutions” segment and the “Wireless Solutions” segment. Our products aredesigned to address four markets: Utility, Cable, Wireless Internet ServiceProviders (“WISP”) and Telecommunication providers. Although we are engaged tovarious degrees in these distinct markets, some of our core technologiesoverlap with our respective solutions.

 

Our Cable Solutionssegment includes products that are used to deliver telephony and data T1/E1links to enterprise and cellular providers over cable’s wireless HFC networks.Additionally, our “Spectrum Overlay” technology is used to expand cableoperators’ typical HFC network capacity in the “last mile” by up to two timesin the downstream and up to four times in the upstream. Our Cable Solutionssegment includes the results of operations of Xtend Networks Ltd., anIsraeli company, and its wholly-owned, U.S.-based subsidiary, XtendNetworks Inc. (collectively, “Xtend”). We purchased all of the outstandingcapital stock of Xtend on June 30, 2004 and consolidated its operationswith our operations beginning July 1, 2004. For a discussion of the Xtendacquisition, please refer to note 6 of our 2005 annual ConsolidatedFinancial Statements.

 

Our Wireless Solutionssegment includes our utility products which enable utilities and other networkservice providers to operate private wireless networks for communications,monitoring and Supervisory Control And Data Acquisition (“SCADA”) of theirgeographically disbursed, remote assets. Additionally, it includes our WISP andtelecommunications products which address the needs of rural service providersto serve customers with wireless, high-speed data beyond the reach oftraditional terrestrial networks.

 

We are focused onpromoting products in our Wireless Solutions segment into the network provider,utility, petrochemical, municipality and enterprise markets. Our CableSolutions segment is focused on both promoting T1 solutions for businessservices over cable networks and promoting cable bandwidth expansion solutionsthat are designed to expand cable operators’ typical HFC network capacity.

 

On March 23, 2006, weclosed the private placement of $25,000,000 of common stock, a ConvertibleNote, a Senior Secured Note and Warrants to purchase common stock to Goldman,Sachs & Co. (the “Financing”), resulting in net proceeds to us ofapproximately $23,400,000. See note 8 above for additional discussion of theFinancing.

 

**CriticalAccounting Principles**

 

The discussion andanalysis of our financial condition and results of operations is based upon ourunaudited condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these financial statements requires us to makeestimates, judgments and assumptions that affect the reported assets andliabilities, revenues and expenses and related disclosure of contingent assetsand liabilities at the date of the financial statements. Actual results maydiffer from these estimates, judgments and assumptions.

 

Our significantaccounting principles are described in the notes to our 2005 annualconsolidated financial statements in the Annual Report on Form 10-K for theyear ended December 31, 2005. 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:

 

18

----

 

***RevenueRecognition***

 

Revenues from sales of products and supplies arerecognized when an arrangement exists, delivery has occurred and title has passedto the customer, our price to the customer is fixed or determinable andcollectability is reasonably assured. When sales transactions include more thenone deliverable (unit of accounting) sold, we follow the guidance of EmergingIssues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with MultipleDeliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.”Under the provisions in these statements, we separate the different units ofaccounting in sales with multiple deliverables based on the objective andreliable evidence of fair value of the different elements. Revenue for each unitof accounting is then recognized when products are delivered or when servicesare rendered or ratably over the contractual period, depending on the nature ofthe deliverable.

 

Our products are generally off-the-shelf products,sold “as is,” without further adjustment or installation. Sales contracts withdistributors stipulate fixed prices and current payment terms and are notsubject to the distributors’ resale or any other contingencies. Accordingly,when all criteria above are met, sales of finished products to distributors arerecognized as revenue upon delivery and after title and risk pass to thedistributors.

 

We do not grant any rights of return or cancellationto any of our customers.

 

In contracts where there is a customer acceptanceprovision or there is uncertainty about customer acceptance, the associatedrevenue is deferred until we have evidence of customer acceptance. We performongoing credit evaluations of our customers’ financial condition and in somecases we require various forms of security.

 

***Investments in Marketable Securities***

 

We have designated our investments in debt securitiesas available-for-sale. Available-for-sale securities are carried at fair value,which is determined based upon the quoted market prices of the securities, withunrealized gains and losses reported in accumulated other comprehensive income(loss), a component of stockholders’ equity, until realized. Realized gains andlosses and declines in value judged to be other-than-temporary onavailable-for-sale securities are included in the Statements of Operations aspart of “Interest Income, net.” We view our available-for-sale portfolio asavailable for use in our current operations. Accordingly, we have classifiedall investments as short-term in the Statements of Operations under “Short-terminvestments,” even though the stated maturity date may be one year or morebeyond the current balance sheet date. Interest, amortization of premiums,accretion of discounts and dividends on securities classified as available-for-saleare also included in our Statements of Operations as part of “Interest Income,net.”

 

We recognize an impairment charge when we determine thedecline in the fair values of these investments below their cost basis is deemedto be other than temporary. We consider various factors in determining whetherto recognize an impairment charge, including the length of time and the extentto which the fair value has been below the cost basis, the current financialcondition of the investee and our intent and ability to hold the investment fora period of time sufficient to allow for any anticipated recovery in marketvalue.

 

***Inventory***

 

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

 

***Employee Stock-Based Compensation***

 

Prior to January 1, 2006, we accounted for stock-basedcompensation under the intrinsic value method, which followed the recognitionand measurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Charges forstock-based compensation represented the amortization of deferred compensationcharges, which was based on aggregate differences between

 

19

----

 

the respectiveexercise price of stock options, shares of restricted stock and purchase priceof the underlying common stock on one hand versus the fair market value of thecommon stock on the other hand. Deferred stock-based compensation is amortizedover the vesting period of the underlying stock options and the shares ofrestricted stock.

 

Under “fixed plan”accounting, compensation cost is fixed, measured at grant date and is notsubsequently adjusted. Under “variable plan” accounting, the measurement dateoccurs after the grant date and compensation cost is estimated and recordedeach period from the grant date to the measurement date, based on thedifference between the option price and the fair market value of the underlyingcommon stock at the end of each period.

 

As of January 1, 2006, weadopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospectivemethod. This new standard requires measurement of stock-based compensation costfor all stock-based awards at the fair value on the grant date and recognitionof stock-based compensation over the service period for awards that we expectwill vest. The fair value of stock options is determined based on the number ofshares granted and the price of our common stock, and calculated based on theBlack-Scholes and the binomial valuation models, which is consistent with ourvaluation techniques previously utilized for options in footnote disclosuresrequired under SFAS No. 123, “Accounting for Stock Based Compensation,” asamended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transitionand Disclosure.” We recognize such value as expense over the service period,net of estimated forfeitures, using the accelerated method under SFAS 123(R).Due to our adoption of SFAS 123(R), we no longer have employee stock-basedcompensation awards subject to variable accounting treatment. The cumulativeeffect of our adoption of SFAS 123(R), as of January 1, 2006, was not material.

 

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

 
| ** **                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(In thousands)**                          | ** ** |
| Cost of revenues            |       | $                                                | 14         |   | $ | — |   |
| Research and  development   |       | $                                                | 217        |   | $ | 27 |   |
| Sales and  marketing        |       | $                                                | 469        |   | $ | 27 |   |
| General and  administrative |       | $                                                | 1,281      |   | $ | — |   |
| Restructuring  adjustments  |       | $                                                | —     |   | $ | (315 | ) |

 

**Recent Accounting Pronouncements**

 

In February 2006, FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments” (“SFAS 155”), which amends SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), andSFAS No. 140, “Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities” (“SFAS 140”). SFAS 155 simplifies theaccounting for certain derivatives embedded in other financial instruments byallowing them to be accounted for as a whole if the holder elects to accountfor the whole instrument on a fair value basis. SFAS 155 also clarifies and amendscertain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective forall financial instruments acquired, issued or subject to a remeasurement eventoccurring in fiscal years beginning after September 15, 2006. We do notexpect the adoption of SFAS155 to have a material impact on our consolidated financial position, resultsof operations or cash flows.

 

20

----

 

## **Resultsof Operations**

## ** **

***Revenues***

 

Revenues increased to $2,369,000 in the three monthsended March 31, 2006 from $704,000 in the three months ended March 31, 2005. Thisincrease in revenues was primarily due to the $1,800,000 in revenue from ourWireless Solutions segment for products sold to Arcadian Networks, Inc. (“ANI”)and $460,000 in revenue from our Cable Solutions segment for products sold to atop five cable television multi-system operator (“MSO”). ANI is a related partyas discussed above in note 3. Revenues for the three months ended March 31, 2006and 2005 did not include inventory previously written down to $0.

 

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

 

| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Customer A |       | 76                                               | %          | — |   |
| Customer B |       | 18                                               | %          | — |   |
| Customer C |       | 1                                                | %          | 25 | % |
| Customer D |       | 1                                                | %          | 22 | % |
| Customer E |       | —                                           |       | 24 | % |
| Customer F |       | —                                           |       | 23 | % |

 

***Cost of Revenues***

 

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

 

Cost of revenues increased to $1,810,000 during thethree months ended March 31, 2006 from $786,000 during the three months endedMarch 31, 2005. This increase in cost of revenues was primarily attributable toincreases in shipments of our products and expenses relating to efforts toacquire new customers. Cost of revenues during the three months ended March 31,2006 and 2005 does not include inventory previously written-down to $0. Ourgross margin during the three months ended March 31, 2006 increased primarilydue to the increase in shipment of our products together with flat fixed costs.We anticipate that our gross margins will continue to fluctuate based on ourproduct and customer mix, revenue level and inventory valuations.

 

***Research and Development***

 

Our research and development expenses were $2,461,000and $2,732,000 during the three months ended March 31, 2006 and 2005,respectively. Approximately $1,135,000 and $1,597,000 of these expenses werefrom our Cable Solutions segment and approximately $1,326,000 and $1,135,000 ofthese expenses were from our Wireless Solutions segment for the three monthsended March 31, 2006 and 2005, respectively. These expenses consist primarilyof personnel, facilities, equipment and supplies and are charged to operationsas incurred. A majority of our research and development activities are conductedin our facility in Israel.

 

The decrease in our research and development expenses inour Cable Solutions segment during the three months ended March 31, 2006resulted from the decrease in our workforce compared to our workforce as ofMarch 31, 2005 and the decrease of subcontractors and materials resulting fromour restructuring program in August 2005. Non-cash expenses related to stockoption grants to our research and development employees and consultants were$217,000 and $27 during the three months ended March 31, 2006 and 2005,respectively.

 

21

----

 

We anticipate that we will need to increase ourresearch and development workforce in future periods to meet our customerdemands.

 

***Sales and Marketing***

 

Sales and marketing expenses decreased to $2,643,000 duringthe three months ended March 31, 2006 compared to $2,687,000 during the threemonths ended March 31, 2005. Sales and marketing expenses consist of salariesand related costs for sales and marketing employees, consulting fees andexpenses for travel, trade shows, market research, branding and promotionalactivities. The decrease in our sales and marketing expenses during the threemonths ended March 31, 2006 reflects our decreased workforce resulting from ourrestructuring program in August 2005.

 

Sales and marketing expenses for our WirelessSolutions segment were approximately $1,082,000 and $1,401,000 in the threemonths ended March 31, 2006 and 2005, respectively. The decrease in theexpenses for our Wireless Solutions segment in the three months ended March 31,2006 mainly resulted from the closing of our China office and our internationalsales department.

 

Sales and marketing expenses for our Cable Solutionssegment were approximately $1,561,000 and $1,286,000 during the three monthsended March 31, 2006 and 2005, respectively. The increase during the threemonths ended March 31, 2006 mainly resulted from increased charges forstock-based compensation of approximately $328,300 during the three monthsended March 31, 2006 compared to approximately $27,000 during the three monthsended March 31, 2005. This increase was partly offset by a decrease in ourrecruiting expenses for sales and marketing personnel from $96,000 during thethree months ended March 31, 2005 to $0 in the three months ended March 31, 2006.

 

We anticipate that our sales and marketing workforcewill increase in future periods as we increase our efforts to penetrate thecable market and meet our customer demands.

 

***General and Administrative***

 

General and administrative expenses were $3,166,000compared to $1,476,000 during the three months ended March 31, 2006 and 2005,respectively. Of these expenses, approximately $285,000 and $152,000 were fromour Cable Solutions segment and approximately $2,881,000 and $1,324,000 werefrom our Wireless Solutions segment during the three months ended March 31, 2006and 2005, respectively. General and administrative expenses consisted primarilyof personnel and related costs for general corporate functions, including finance,accounting, implementation of the Sarbanes-Oxley Act of 2002, strategic andbusiness development and legal.

 

The increase in general and administrative expenses duringthe three months ended March 31, 2006 compared to the three months ended March 31,2005 was primarily due to (a) an increase in our non-cash stockcompensation charges from $0 during the three months ended March 31, 2005 to$1,281,000 during the three months ended March 31, 2006, (b) an increase inexecutive staff and professional fees for the Cable Solutions segment and(c) a one-time severance provision of $300,000 in connection with the new employmentagreement of our Chief Executive Officer and Chairman of the Board of Directors.These increases were offset by a decrease in travel expenses of approximately$170,000.

 

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

 

***Amortization of Intangible Assets***

 

Amortization of intangible assets acquired was $0 and$509,000 during the three months ended March 31, 2006 and 2005, respectively.The fair value of the intangible assets was estimated by management with theassistance of an independent third party appraiser, based upon future expecteddiscounted cash-flows as of December 31, 2005. Based on this appraisal, byusing a weighted discounted cash flow model for the estimation of a fair valueof group of assets as set forth in SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” together with other facts and circumstances,we decided to record an impairment charge of $11,388,000 related to the fullremaining carrying value of the intangible assets as of December 31, 2005. Therefore,we did not amortize intangible assets during the three months ended March 31,2006.

 

22

----

 

The amortization of intangible assets acquired for thethree months ended March 31, 2005 consisted of the amortization of existingtechnology of $92,000 (recorded in our Statements of Operations as “Cost of Revenues”),non-competition agreements of $220,000, an exclusive sales agreement of $135,000and workforce of $62,000. For additional information, see notes 6 and 7 of our2005 annual consolidated financial statements included in our Annual Report onForm 10-K.

 

***Restructuring Charges***

 

In 2001, we implemented a restructuring program toreduce operating expenses due to the dramatic and continuing slowdown in thetelecommunications sector and the general economy. In connection with thisprogram, we recorded restructuring income of $315,000 during the three monthsended March 31, 2005 from a positive adjustment with respect to a variablecompensation plan related to our former chief executive officer.

 

As of December 31, 2005, there were no severanceexpenses or termination of contractual obligations payments attributable to therestructuring. Therefore, no restructuring charges were recorded during thethree months ended March 31, 2006.

 

***Interest Income (Expense), Net***

 

Interest income (expense), net, includes interest andinvestment income, foreign currency remeasurement gains and losses. Netinterest expense was ($269,000) for the three months ended March 31, 2006 comparedto net interest income of $76,000 for the three months ended March 31, 2005. Netinterest expense increased due to increased interest on our amended Promissory Note,10% Convertible Note and 9.5% Senior Secured Note. These increases werepartially offset by interest income derived mainly from our cash and short-terminvestment balances, and recognition of an other-than-temporary impairment inour available-for-sale securities of ($42,000) and realized losses of $31,000. Forthe three months ended March 31, 2005, we recorded an other-than-temporaryinvestment impartment of $112,000 given our determination that we may not holdthe debt securities for a reasonable time beyond maturity.

 

We will incur increased interest expenses for theremainder of 2006 and beyond due to long-term debt related to our Financingwith Goldman, Sachs & Co. in which $10,000,000 of the proceeds bear anannual interest rate of 10.0% and $7,500,000 of the proceeds bear an annualinterest rate of 9.5%, and the amortization of deferred expenses incurred aspart of the Financing. Interest expenses also will increase given the accretionto the value of the $6,500,000 amended Promissory Note delivered as part of theacquisition of Xtend. Accretion of $2,533,000 will be recorded throughout theterm of the amended Promissory Note, unless the note is cancelled.

 

***Income Taxes***

 

As of December 31, 2005, our Israeli subsidiaries had netoperating loss carryforwards of approximately $90,000,000. These carryforwardshave no expiration date.

 

Our Israeli subsidiaries have been granted “ApprovedEnterprise” status for several investment programs. The “Approved Enterprise”status 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 31% for 2006) for theremaining term of the program on the plan’s proportionate share of income.

 

Since our Israeli subsidiaries have not achievedtaxable income, the tax benefits periods have not yet commenced. The subsidiaries’losses are expected to offset certain future earnings of the subsidiariesduring the tax-exempt period; therefore, the utilization of the net operatinglosses will generate no tax benefits. Accordingly, deferred tax assets fromsuch losses have not been included in our 2005 annual consolidated financial statements.The entitlement to the above benefits is conditioned upon the subsidiariesfulfilling the conditions stipulated by the law, regulations publishedthereunder and the instruments of approval for the specific investments inapproved enterprises.

 

***Discontinued Operation***

 

On August 12, 2003, ourBoard of Directors determined to cease the software business operated by ShiraComputers Ltd. (“Shira”), the Company’s wholly owned subsidiary, and terminateall of Shira’s employees due to the continuing decline in Shira’s sales, Shira’srecurring losses and its inability to penetrate the market. On March 31, 2005, we sold all of our shares ofShira to third parties. Under the sale agreement, the purchasers must pay us22.5% to 42.5% of the proceeds that they receive upon a later sale by of Shiraor its assets. The purchasers have assumed all of Shira’s liabilitiestotaling $270,000. The gain from this salewas $290,000 and was recorded in discontinued operations.

 

 

23

----

 

 

**Liquidityand Capital Resources**

 

As of March 31, 2006, we had $30,673,000 of cash, cashequivalents and short-term investments. During the three months ended March 31,2006, net cash used in operations was $4,087,000, comprised mainly of our lossof $7,980,000, partially offset by (a) non-cash charges related to depreciationand amortization of $594,000 and stock-based compensation of $1,981,000, (b) anincrease of liability for employee rights upon retirement of $301,000, and (c) changesin other working capital accounts of $1,017,000. During the three months endedMarch 31, 2005, net cash used in operations was $7,755,000, comprised mainly of(a) our loss of $ 6,738,000, (b) changes in other working capital accounts of$1,503,000, and (c) non-cash charges of income related to stock-basedcompensation of $261,000 partially offset by non-cash charges of depreciationand amortization of $761,000.

 

During the three months ended March 31, 2006, net cashprovided by investing activities was $3,674,000 comprised of sales andmaturities of our short-term investments net of $3,739,000 in purchases ofshort-term investments. During the three months ended March 31, 2005, net cashprovided by investing activities was $4,204,000 comprised of $4,725,000 net of salesand purchases of our short-term investments partially offset by $554,000 in purchasesof property and equipment.

 

Financing activities in the three months ended March31, 2006 were approximately $24,874,000 related to (a) the Financing, whichincluded the issuance of our common stock, 9.5% Senior Secured Note, 10% ConvertibleNote and Warrants to purchase our common stock, net of issuance cost and (b) proceedsfrom stock option exercises. See note 8 above for additional information aboutthe Financing. Financing activities in the three months ended March 31, 2005 wereapproximately $240,000 consisting of proceeds from stock option exercises and notesreceivables from stockholders.

 

Our capital requirements depend on numerous factors,including market acceptance of our products, the resources we devote todeveloping, marketing, selling and supporting our products, the timing andextent of establishing additional international operations and other factors.We expect that our cash and investment balances will be sufficient to meet ourworking capital and capital expenditure needs for the next 12 months. We mayneed to raise additional funds for a number of uses. We may not be able toobtain additional funds on acceptable terms, or at all. The sale of additionalequity or convertible debt securities may result in additional dilution to ourstockholders.

 

**Forward-Looking Statements**

 

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

 

•      our belief thatour most critical accounting principles include principles relate to revenue recognition,short-term investments, inventory and employee stock-based compensation;

 

•      our belief thatSFAS 155 will not have a material impact on our consolidated financialposition, results of operations or cash flows;

 

•      our expectationthat a few customers will account for a large percentage of our revenues;

 

•      our expectation thatour gross margins will continue to fluctuate based on our product and customermix, revenue level and inventory valuations;

 

•      our expectationthat we will need to increase our research and development workforce in futureperiods to meet our customer demands;

 

24

----

 

•      our expectationthat our sales and marketing workforce will increase in future periods as weincrease our efforts to penetrate the cable market and meet our customerdemand;

 

•      our expectationthat general and administrative expenses will be higher in the future as wecontinue to implement internal controls over financial reporting as required bythe Sarbanes-Oxley Act and to execute our strategic plans and businessdevelopment efforts;

 

•      our expectationthat we will incur increased interest expenses for the remainder of 2006 andbeyond;

 

•      our expectationthat the losses of our Israeli subsidiaries will offset certain future earningsof the subsidiaries during their tax-exempt period and that, therefore, we willreceive no tax benefits from the utilization of the net operating losses;

 

•      our expectationthat our cash and investment balances will be sufficient to meet our workingcapital and capital expenditure needs for the next 12 months;

 

•      our belief thatwe may need additional capital to execute our business plan;

 

•      our belief thatwe may not be able to obtain additional funds on acceptable terms, or at all;and

 

•      our belief thatwe may need to sell additional equity or convertible debt securities, whichwould result in additional dilution to our stockholders.

 

You can identify these and other forward-lookingstatements by the use of words such as “may,” “will,” “should,” “could,” “intend,”“expect,” “plan,” “estimate,” “project,” “anticipate,” “believe,” “potential,” “continue,”or the negative of such terms, or other comparable terminology. The risks,uncertainties and assumptions referred to above that could cause our actualresults to differ materially from the results expressed or implied by suchforward-looking statements include those set forth under Item 1A below andthe risks, uncertainties and assumptions discussed from time to time in ourother public filings and public announcements. All forward-looking statementsincluded in this document are based on information available to us as of thedate hereof, and we assume no obligation to update these forward-lookingstatements.

 

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

 

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

 

***As of March 31, 2006, we had cash,cash equivalents and short-term investments of $30,673,000. Substantially allof these amounts consisted of corporate and government fixed income securitiesand money market funds that invest in corporate and government fixed incomesecurities that are subject to interest rate risk. We place our investmentswith high credit quality issuers and by policy limit the amount of the creditexposure to any one issuer.***

 

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

 

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

 

25

----

 

**QuantitativeInterest Rate Disclosure as of March 31, 2006**

 

***If market interest rates were toincrease on March 31, 2006 immediately and uniformly by 10%, the fair value ofthe portfolio would decline by approximately $39,000, or approximately 0.16% ofthe total portfolio (approximately 0.09% of total assets). Assuming that theaverage yield to maturity on our portfolio at March 31, 2006 remains constantthroughout the second quarter of 2006 and assuming that our cash, cashequivalents and short-term investments balances at March 31, 2006 remainconstant for the duration of the second quarter of 2006, interest income forthe second quarter of 2006 would be approximately $260,000. Assuming a declineof 10% in the market interest rates at March 31, 2006, interest income for the secondquarter of 2006 would be approximately $236,000, which represents a decrease ininterest income of approximately $24,000. The decrease in interest income willresult in a decrease of the same amount to net income and cash flows fromoperating activities for the three months ended March 31, 2006. These amountsare determined by considering the impact of the hypothetical interest rates onour cash equivalents and available-for-sale securities at March 31, 2006 overthe remaining contractual lives.***

*** ***

**Item 4.****            Controlsand Procedures**

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, our disclosure controls and procedures were effective toensure that information we are required to disclose in reports that we fileunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission rules andforms.

 

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

 

**PART II.****        OTHERINFORMATION**

 

**Item 1A.****         RiskFactors**

 

Our business is subjectto substantial risks, including the risks described below.

 

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

 

We have incurredsignificant losses since our inception, and we expect to continue to incurlosses for the foreseeable future. We incurred losses of $7,980,000 for thethree months ended March 31, 2006. As of March 31, 2006, our accumulateddeficit was $243,130,000. Our revenues and gross margins may not grow or evencontinue at their current level and may decline even further. If our revenuesdo not rapidly increase, or if our expenses increase at a greater pace than ourrevenues, we will never become profitable.

 

**We have written down and may needto further write-down our inventory in the future if our sales levels do notmatch our expectations, or if selling prices decline more than we anticipate,which could adversely impact our operating results.**

 

We operate in an industrythat is characterized by intense competition, supply shortages or oversupply,rapid technological change, declining average selling prices and rapid productobsolescence, all of which make it more challenging to effectively manage ourinventory. In addition, we are required to order or build inventory well inadvance of the time of our anticipated sales.

 

Our inventory is statedat the lower of cost or market value. Determining market value of our inventoryinvolves numerous judgments, including, but not limited to, judgments regardingaverage selling prices and sales volumes for future periods. We primarilyutilize estimated selling prices for measuring any potential declines in marketvalue below cost. When market value is determined to be below cost, we makeappropriate allowances to reduce the value of inventories to net realizedvalue. We may reduce the value of our inventory when we determine

 

26

----

 

that inventory is slow moving, obsolete or excess or where the sellingprice of the product is insufficient to cover product costs and sellingexpenses.

 

In this regard, ourinventory increased substantially in 2004 and 2005 because sales were substantiallyless than our anticipated demand and we were required to make advance inventorypurchase commitments for anticipated sales. Accordingly, we recorded a writedown of inventory and purchase commitments of approximately $2,050,000 for theyear ended December 31, 2005. Our inventory levels decreased during the threemonths ended March 31, 2006 due to increased sales of our products.

 

In the event that oursales 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.

 

**We may have insufficient capitalto execute our business plan.**

 

On March 23, 2006, weclosed the Financing of $25,000,000 from Goldman, Sachs & Co., resulting innet proceeds to us of approximately $23,400,000. Notwithstanding this Financing,we may need additional capital to execute our business plan. If we are unsuccessfulin securing additional cash, either through additional equity and/or debtfinancings or increased revenues, we may not be able to successfully executeour business plan.

 

**If an event of default occursunder either the Convertible Note or the Senior Secured Note delivered toGoldman, Sachs & Co. in the financing, the principal and accrued interestunder each note would become due and payable which would substantially harm ourcash position and business prospects.**

 

On March 23, 2006, weclosed the Financing for $25,000,000 which included delivery of a 10% ConvertibleNote in the principal amount of $10,000,000 and a 9.5% Senior Secured Note inthe principal amount of $7,500,000. Each of these notes contains events ofdefault that, if triggered, would require us to pay the principal and accruedinterest under both notes immediately (after the expiration of applicable cureperiods). If an event of default occurs under the notes and the holder declaresall outstanding principal and interest immediately due and payable, our cashposition and business prospects would be substantially harmed.

 

**If we fail to achieve significantmarket penetration and customer acceptance of our cable products, our prospectswould be substantially harmed.**

 

The market for broadbandproducts in the cable television industry is extremely competitive, subject todrastic technological changes and highly fragmented. Our products in the CableSolutions segment are new and relatively unknown; accordingly, we have notgenerated significant revenue in this segment. To date, we have only begun toinstall our Spectrum Overlay products with customers in field trials. There canbe no assurance that our initial installations of our cable products will besuccessful. As our cable products are in a development stage, we may facechallenges such as market resistance to a new product, perceptions regardingcustomer support and quality control.

 

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

 

27

----

 

**The loss of one or more of ourkey customers would result in a loss of a significant amount of our revenuesand adversely affect our business.**

 

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

 

| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Customer A |       | 76                                               | %          | — |   |
| Customer B |       | 18                                               | %          | — |   |
| Customer C |       | 1                                                | %          | 25 | % |
| Customer D |       | 1                                                | %          | 22 | % |
| Customer E |       | —                                           |       | 24 | % |
| Customer F |       | —                                           |       | 23 | % |

 

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

 

In this regard, sales toCustomer A in the three months ended March 31, 2006 accounted for the vastmajority of our sales during the three months ended March 31, 2006. Thiscustomer was recently formed and capitalized and has no history of operations,profitable or otherwise. We expect sales to this customer to be material to ouroperations for the foreseeable future. If such customer is not successful inoperating its business, or if sales to this customer are lower than ourexpectations, our business could be harmed.

 

**Our success will depend on MSOswillingness and ability to substantially increase the available bandwidth ontheir networks using our alternative technology solution.**

 

For our cable products tobe sold in significant quantities, MSOs must be willing and able tosubstantially increase the available bandwidth on their networks. MSOs may notbe willing or able to develop additional services and revenue streams tojustify the deployment of our technology. Meanwhile, major MSOs have indicatedthat the imminent completion of significant network upgrades, which involvesignificant labor and construction costs, will lead to lower capitalexpenditures in the future. If our product portfolio and product developmentplans do not position us well to capture an increased portion of the expectedreduced capital spending of these cable operators, our operating results wouldbe adversely affected.

 

**If the adoption of broadbandwireless technology continues to be limited, we will not be able to sustain orexpand our business.**

 

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

 

While we are continuingto operate our traditional Wireless Solutions segment and have increased oursales and marketing efforts to address the utilities and oil and gas market andother new markets, we may also consider a variety of alternatives to thisbusiness, including the sale, divestiture, license or restructuring of asubstantial portion or all of our current wireless network technology orassets. In the event of any such transaction, the value we may realize in thecurrent market could be minimal.

 

28

----

 

**If telecommunications serviceproviders and systems integrators do not promote and purchase our products, orif the telecommunications equipment market does not improve and grow, ourbusiness will seriously be harmed.**

 

Telecommunicationsservice providers continually evaluate alternative technologies, includingdigital subscriber line, fiber and cable. Should service providers or systemsintegrators, to which we may sell products in the future, cease to emphasize systemsthat include our products, choose to emphasize alternative technologies orpromote systems of our competitors, our business would be seriously harmed.

 

Market conditions remaindifficult and capital spending plans are often constrained. It is likely thatfurther industry restructuring and consolidation will take place. Companiesthat have historically not had a large presence in the broadband accessequipment market have begun recently to expand 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.

 

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

 

**If the communications, Internetand cable television industries do not grow and evolve in a manner favorable toour business strategy, our business may be seriously harmed.**

 

Our future success isdependent upon the growth of the communications industry, the cable televisionindustry and, in particular, the Internet. These markets continue to evolverapidly because of advances in technology and changes in customer demand. Wecannot predict growth rates or future trends in technology development. It is possiblethat cable television operators, telecommunications companies or othersuppliers of broadband services will decide to adopt alternative architecturesor technologies that are incompatible with our current or future products. Ifwe are unable to design, develop, manufacture and sell products thatincorporate or are compatible with these new architectures or technologies, ourbusiness will suffer. Also, decisions by customers to adopt new technologies orproducts are often delayed by extensive evaluation and qualifications processesand can result in delays of current products.

 

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

 

**Our success depends significantlyon Davidi Gilo, our Chairman of the Board and Chief Executive Officer, the lossof whom could seriously harm our business.**

 

Our future successdepends in large part on the continued services of our senior management andkey personnel. In particular, we are significantly dependent on the services ofDavidi Gilo, our Chairman of the Board and Chief Executive Officer. We do notcarry key person life insurance on our senior management or key personnel. Anyloss of the services of Mr. Gilo or other members of senior management or otherkey personnel could seriously harm our business.

 

**We may not be able tosuccessfully operate businesses that we may acquire, in a cost-effective andnon-disruptive manner and realize anticipated benefits.**

 

We may continue toexplore investments in or acquisitions of other companies, products ortechnologies, including companies or technologies that are not complementary orrelated to our current wireless broadband access business. We ultimately may beunsuccessful in operating and/or integrating an acquired company’s personnel,operations, products and technologies into our business. These difficulties maydisrupt our ongoing business, divert the time and attention of our managementand employees and increase our expenses.

 

Moreover, the anticipatedbenefits of our acquisition of Xtend or any other acquisition may not berealized. Future acquisitions could result in dilutive issuances of equitysecurities, the incurrence of debt, contingent liabilities or amortizationexpenses related to goodwill and other identifiable intangible assets and theincurrence of large and

 

29

----

 

immediate write-offs, any of which could seriously harm our business.In addition, we expect that we will expend significant resources in searchingfor and investigating new business opportunities, and may be unsuccessful inacquiring new businesses.

 

**We will need to developdistribution channels and management resources to market and sell our cableproducts.**

 

Our Spectrum Overlaysolutions are at a development stage in the commercialization of our cableproducts. We currently have limited relationships with potential customers anddistributors as well as limited professional sales staff. We will be successfulonly if we are able to develop distribution channels to market and sell ourcable products.

 

In order to develop suchchannels and market and sell our cable products, we will need to continue tobuild a well-connected team of executives and marketing professionals. Many ofthese executive and professionals will need to be based in the United States.It may be difficult for us to hire and retain qualified personnel. Integratingnew personnel, particularly U.S. based personnel, may be challenging from aculture and logistics perspective because most of our employees in our Cable Solutionssegment are currently based in Israel. Meanwhile, our management has limitedexperience in the cable industry.

 

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

 

**We have not yet produced ordeployed our cable products in high volumes.**

 

We have not yet producedour Spectrum Overlay solutions products 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.

 

Because we have not yetdeployed our Spectrum Overlay solutions products in high volume, there issignificant technology risk associated with any such future deployment. Wecannot be sure that any such high volume deployment would be successful.

 

**We will depend on cable andtelecommunications industry capital spending for much of our revenue and anydecrease or delay in such spending would adversely affect our prospects.**

 

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

 

•              theavailability of cash or financing;

 

•              budgetaryissues;

 

•              regulationand/or deregulation of the telecommunications industry;

 

•              competitivepressures;

 

•              alternativetechnologies;

 

•              overalldemand for broadband services, particularly relatively new services such as voiceover internet protocol (“VoIP”);

 

•              industrystandards;

 

•              thepattern of increasing consolidation in the industry; and

 

•              generalconsumer spending and overall economic conditions.

 

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

 

30

----

 

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

 

Because our cableproducts expand available bandwidth over existing infrastructure, demand forthese products depends on demand for additional bandwidth by the cable industryand its end customers. The scope and timing of end customer demand for suchadditional bandwidth is uncertain and hard to predict. The factors influencingthis demand include competitive offerings, applications availability, pricingmodels, costs, regulatory requirements and the success of initial roll-outs. Ifthe future demand for bandwidth is insubstantial, is addressed by alternativetechnologies or does not develop in the near future, our prospects would beadversely affected.

 

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

 

We are not active in thestandards process of the Cable Television Laboratories, Inc., a cable industryconsortium that establishes cable technology standards and administers compliancetesting. In the future, we may determine to join or not join other standards orsimilar organizations. Our membership in these organizations could dilute ourproprietary intellectual property rights in our products while our failure toparticipate in others could jeopardize acceptance of any of our products thatdo not meet industry standards.

 

**Product standardization, as mayresult from wireless industry initiatives or from initiatives of the majorcable operators, may adversely affect our prospects.**

 

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

 

**Since we reduced our workforce inAugust 2005, our research and development efforts could be harmed.**

 

We implemented a costreduction program in August 2005 by reducing our workforce. The fullimplementation of this program resulted in a reduction of our workforce ofapproximately 16%. This reduction has had the largest effect on our researchand development activities. Our ability to further develop and market ourproducts may be limited if we have not accurately predicted the appropriateworkforce requirements for our research and development efforts. In thisregard, we are currently experiencing some difficulty in hiring skilledresearch and development personnel in Israel. If this difficulty continues inthe foreseeable future, our research and development efforts would be harmed.

 

**Competition may result in loweraverage selling prices, and we may be unable to reduce our costs at offsettingrates, which may impair our ability to achieve profitability.**

 

There has beensignificant price erosion in the broadband equipment field. We expect thatcontinued price competition among broadband access equipment and systemssuppliers will reduce our gross margins in the future. We anticipate that theaverage selling prices of broadband access systems will continue to decline asproduct technologies mature. We may be unable to reduce our manufacturing costsin response to declining average per unit selling prices. Our competitors maybe able to achieve greater economies of scale and may be less vulnerable to theeffects of price competition than we are. These declines in average selling priceswill generally lead to declines in gross margins and total 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.

 

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

 

Future demand for ourbroadband wireless and cable products will depend significantly on the growingmarket acceptance of several emerging broadband services, including digitalvideo, video-on-demand (VOD), high definition television, very high-speed dataservices and VoIP telephony. The effective delivery of these services willdepend in part on a variety of new network architectures, such as fiber-to-thepremises networks, new video compression standards such as MPEG-4 and Microsoft’sWindows Media 9, the greater use of protocols such as IP and the introductionof new consumer devices, such as advanced set-top boxes and digital videorecorders. If adoption of these emerging services and/or technologies is not aswidespread or as rapid as we expect, our net sales growth would be materiallyand adversely affected.

 

31

----

 

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

 

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

 

•              theuse of digital video by businesses and governments;

 

•              theprivatization of state owned telecommunication companies in other countries;

 

•              effortsby regulators and governments in the United States and abroad to encourage theadoption of broadband and digital technologies; and

 

•              theextent and nature of regulatory attitudes toward such issues as competitionbetween operators, access by third parties to networks of other operators andnew services such as VoIP.

 

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

 

**Our quarterly operating resultsfluctuate, which may cause our share price to decline.**

 

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

 

•              theuncertain timing and level of market acceptance for our systems and theuncertain timing and extent of rollouts of broadband access equipment andsystems by the major service providers;

 

•              thefact that we often recognize a substantial proportion of our revenues in thelast few weeks of each quarter;

 

•              theability of our existing and potential direct customers to obtain financing forthe deployment of broadband access equipment and systems;

 

•              themix of products sold by us and the mix of sales channels through which they aresold;

 

•              reductionsin pricing by us or our competitors;

 

•              globaleconomic conditions;

 

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

 

•              changesin the prices or delays in deliveries of the components we purchase or license;and

 

•              anyacquisitions or dispositions we may effect.

 

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

 

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

 

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

 

32

----

 

•              economic,inflation and political instability;

 

•              terroristacts, international conflicts and acts of war;

 

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

 

•              changesin regulatory requirements and licensing frequencies to service providers;

 

•              importor export licensing requirements and tariffs;

 

•              laborshortages or stoppages;

 

•              traderestrictions and tax policies; and

 

•              limitedprotection of intellectual property rights.

 

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

 

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

 

Our research anddevelopment and final testing and assembly facilities, a majority of ouremployees and some of our contract manufacturers are located in Israel.Political, economic and military conditions in Israel directly affect ouroperations. Since the establishment of the State of Israel in 1948, a number ofarmed conflicts have taken place between Israel and its Arab neighbors and astate of hostility, varying in degree and intensity, has led to security andeconomic problems for Israel. Hostilities within Israel have dramaticallyescalated in recent years, which could disrupt our operations. In addition, therecent wars in Iraq and Afghanistan and the current military and politicalpresence of the United States or its allies in Iraq and Afghanistan could causeincreasing instability in the Middle East and further disrupt relations betweenIsrael and its Arab neighbors. We could be adversely affected by any majorhostilities involving Israel, the interruption or curtailment of trade betweenIsrael and its trading partners, a significant increase in inflation or asignificant downturn in the economic or financial condition of Israel. As aresult of the hostilities and unrest presently occurring within Israel and theMiddle East, the future of the peace efforts between Israel and its Arabneighbors is uncertain. Moreover, several countries still restrict businesswith Israel and with Israeli companies. We could be adversely affected byrestrictive laws or policies directed towards Israel or Israeli businesses.

 

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

 

**Because substantially all of ourrevenues are generated in U.S. dollars while a portion of our expenses areincurred in New Israeli Shekels, our results of operations could be seriouslyharmed if the rate of inflation in Israel exceeds the rate of devaluation ofthe New Israeli Shekel against the U.S. dollar.**

 

Our functional currencyis the U.S. dollar. We generate substantially all of our revenues in U.S.dollars, but we incur a substantial portion of our expenses, principallysalaries and related personnel expenses related to research and development, inNew Israeli Shekels, or NIS. As a result, we are exposed to the risk that therate of inflation in Israel will exceed the rate of devaluation of the NIS inrelation to the dollar or that the timing of this devaluation lags behindinflation in Israel.

 

**Because we generally do not havelong-term contracts with our customers, our customers can discontinue purchasesof our systems at any time, which could adversely affect future revenues andoperating results.**

 

We generally sell ourbroadband access equipment and systems based on individual purchase orders. Ourcustomers generally are not obligated by long-term agreements to purchase oursystems, and the agreements we have entered into, other than our agreement withANI, do not obligate our customers to purchase a minimum number of systems. Ourcustomers can generally cancel or reschedule orders on short notice anddiscontinue using our systems at any time. Further, having a successful fieldsystem trial does not necessarily mean that the customer will order

 

33

----

 

large volumes of our systems. The reduction, delay or cancellation oforders from one or more of our customers could seriously harm our operatingresults.

 

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

 

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

 

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

 

**Competition may decrease ourmarket share, net revenues and gross margins, which could cause our stock priceto decline.**

 

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

 

•              productperformance, features and reliability;

 

•              price;

 

•              stability;

 

•              scopeof product line;

 

•              salesand distribution capabilities;

 

•              technicalservice and support;

 

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

 

•              industrystandards.

 

Certain of ourcompetitors and potential competitors have substantially greater financial,technical, distribution, marketing and other resources than we have and,therefore, may be able to respond more quickly to new or 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 Alvarion Inc.; Aperto Networks, Inc.;NextNet Wireless, Inc.; IP Wireless, Inc.; Navini Networks, Inc.; Wi-LAN Inc.;SR Telecom Inc.; Harris Corporation; Cambridge Wireless Limited; FlarionTechnologies Inc. (acquired by Qualcomm Incorporated in January 2006); VComInc.; Airspan Networks, Inc.; ZTE Corporation; Scientific Atlanta (purchased byCisco Systems, Inc. in 2006); Motorola, Inc.; C Cor Incorporated and NaradNetworks, Inc. Most of these competitors have existing relationships with oneor more of our prospective customers. For our broadband wireless offerings, weface competition from technologies such as digital subscriber line, fiber andcable. In the cable industry, our cable offerings face competition fromtechnologies such as digital set-top boxes, high-end compression technologiesand DVRs. Furthermore, the move toward open standards may increase the numberof operators who will offer new services, which in turn may increase the numberof competitors and drive down the capital expenditures per subscriber deployed.We may not be able to compete successfully against our current and futurecompetitors, and competitive pressures could seriously harm our business.

 

34

----

 

**Hardware defects or firmwareerrors could increase our costs and impair the market acceptance of oursystems, which would adversely affect our future operating results.**

 

Our systems willoccasionally contain certain defects or errors. This may result either fromdefects in components supplied by third parties or from errors or defects inour firmware or hardware that we have failed to detect. We have in the pastexperienced, and may experience from time to time in the future, defects in newor enhanced products and systems after commencement of commercial shipments, ordefects in deployed systems. This may be observed in connection with stabilityor other performance problems. Our customers integrate our systems into theirnetworks with components from other vendors. Accordingly, when problems occurin a network system, it may be difficult to identify the component that causedthe problem. Regardless of the source of these defects or errors, we will needto divert the attention of our engineering personnel from our productdevelopment efforts to address the defect or error. We have incurred in the pastand may again incur significant warranty and repair costs related to defects orerrors, and we also may be subject to liability claims for damages related tothese defects or errors. The occurrence of defects or errors, whether caused byour systems or the components of another vendor, may result in significantcustomer relationship problems and injury to our reputation and may impair themarket acceptance of our systems.

 

**We depend on contractmanufacturers and third party equipment and technology suppliers, and thesemanufacturers and suppliers may be unable to fill our orders or developcompatible, required technology on a timely basis, which would result in delaysthat could seriously harm our results of operations.**

 

We currently haverelationships with a limited number of contract manufacturers for themanufacturing of our broadband wireless systems, substantially all of whom arelocated in Israel and Taiwan. Our cable products are manufactured in Israel bycontract manufacturers. These relationships may be terminated by either partywith little or no notice. If our manufacturers are unable or unwilling tocontinue manufacturing our systems in required volumes, we would have toidentify qualified alternative manufacturers, which would result in delays thatcould cause our results of operations to suffer. Our limited experience withthese manufacturers does not provide us with a reliable basis on which toproject their ability to meet delivery schedules, yield targets or costs. If weare required to find alternative manufacturing sources, we may not be able tosatisfy our production requirements at acceptable prices and on a timely basis,if at all. Any significant interruption in supply would affect the allocationof systems to customers, which in turn could seriously harm our business. Inaddition, we currently have no formal written agreement with a manufacturer forour modem products. Our current inventory of modems will likely be insufficientto fulfill anticipated demand, and we will therefore be required to find amanufacturer in the near future. Our inability to enter into a writtenagreement with a manufacturer for our modems would harm our business.

 

In addition to sales tosystem integrators, we also sell in some instances directly to service providers.Such direct sales require us to resell equipment to service providersmanufactured by third party suppliers and to integrate this equipment with theequipment we manufacture. We are particularly dependent on third party radiosuppliers in selling our 3.5 Ghz and other products. We currently have noformal relationship with any third party supplier. If we are unable toestablish relationships with suppliers, or if these suppliers are unable toprovide equipment that meets the specifications of our customers on thedelivery schedules required by our customers, and at acceptable prices, ourbusiness would be substantially harmed.

 

Our Spectrum Overlaysolutions products 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 ourSpectrum Overlay products. In addition, we depend on the continuous delivery ofcomponents by various manufacturers of electronic connectors, filters, boardsand transistors.

 

**We obtain some of the componentsincluded in our systems from a single source or a limited group of suppliers,****and the loss of any of these suppliers could causeproduction delays and a substantial loss of revenue.**

 

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

 

•                                    delaysin delivery or shortages in components could interrupt and delay manufacturingand result in cancellation of orders for our systems;

 

•                                    supplierscould increase component prices significantly and with immediate effect;

 

35

----

 

•                                    wemay not be able to develop alternative sources for system components, if or asrequired in the future;

 

•                                    supplierscould discontinue the manufacture or supply of components used in our systems.In such event, we might need to modify our systems, which may cause delays inshipments, increased manufacturing costs and increased systems prices; and

 

•                                    wemay hold more inventory than is immediately required to compensate forpotential component shortages or discontinuation.

 

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

 

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

 

We have increased certainexpenses to address new business opportunities in both the Wireless Solutionsand Cable Solutions segments, and we will need to continue to monitor closelyour costs and expenses. If the market and our business do not expand, we mayneed to further reduce our operations. In addition, our acquisition of Xtendhas caused our costs to increase as we seek to develop business.

 

**Delays and shortages in thesupply of components from our suppliers and third party vendors could reduceour revenues or increase our cost of revenue.**

 

Delays and shortages inthe supply of components are typical in our industry. We have experienced minordelays and shortages on more than one occasion in the past. In addition, anyfailure of necessary worldwide manufacturing capacity to rise along with a risein demand could result in our subcontract manufacturers allocating availablecapacity to larger customers or to customers that have long-term supplycontracts in place. Our inability to obtain adequate manufacturing capacity atacceptable prices, or any delay or interruption in supply, could reduce ourrevenues or increase our cost of revenue and could seriously harm our business.

 

**Third parties may bringinfringement claims against us that could harm our ability to sell our productsand result in substantial liabilities.**

 

Third parties couldassert, and it could be found, that our technologies infringe their proprietaryrights. We could incur substantial costs to defend any litigation, andintellectual property litigation could force us to do one or more of thefollowing:

 

•              obtainlicenses to the infringing technology;

 

•              paysubstantial damages under applicable law;

 

•              ceasethe manufacture, use and sale of infringing products; or

 

•              expendsignificant resources to develop non-infringing technology.

 

Any infringement claim orlitigation against us could significantly harm our business, operating resultsand financial condition.

 

**If we fail to adequately protectour intellectual property, we may not be able to compete and our ability to provideunique products may be compromised.**

 

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

 

36

----

 

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

 

We regularly evaluate andseek to explore and develop derivative products relating to our WirelessSolutions and Cable Solutions segments systems. We may not be able to secureall desired intellectual property protection relating to such derivativeproducts. Furthermore, because of the rapid pace of change in the broadbandindustry, much of our business and many of our products rely on technologiesthat evolve constantly and this continuing uncertainty makes it difficult toforecast future demand for our products.

 

**Because of our long productdevelopment process and sales cycle, we may incur substantial expenses withoutanticipated revenues that could cause our operating results to fluctuate.**

 

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

 

**Government regulation andindustry standards may increase our costs of doing business, limit ourpotential markets or require changes to our business model and adversely affectour business.**

 

The emergence orevolution of regulations and industry standards for broadband products, throughofficial standards committees or widespread use by operators, could require usto modify our systems, which may be expensive and time-consuming, and to incursubstantial compliance costs. Radio frequencies are subject to extensiveregulation under the laws of the United States, foreign laws and internationaltreaties. Each country has different regulations and regulatory processes forwireless communications equipment and uses of radio frequencies. Failure by theregulatory authorities to allocate suitable, sufficient radio frequencies topotential customers in a timely manner could result in the delay or loss ofpotential orders for our systems and seriously harm our business.

 

We are subject to exportcontrol laws and regulations with respect to certain of our products andtechnology. We are subject to the risk that more stringent export control requirementscould be imposed in the future on product classes that include productsexported by us, which would result in additional compliance burdens and couldimpair the enforceability of our contract rights. We may not be able to renewour export licenses as necessary from time to time. In addition, we may berequired 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 costsand devoting more management resources to comply with increasing regulation ofcorporate governance and disclosure.**

 

The Sarbanes Oxley Act of2002 that became law in July 2002 and the resulting rules of the NasdaqNational Market have required and will continue to require changes in ourcorporate governance, public disclosure and compliance practices. The number ofrules and regulations applicable to us has increased and will continue toincrease our legal and financial compliance costs. In addition, we haveincurred and will continue to incur significant costs as we prepare to complywith Section 404 of the Sarbanes Oxley Act of 2002 regarding internal controlover financial reporting. These laws and regulations and perceived increasedrisk of liability could make it more difficult for us to attract and retainqualified members of our Board of Directors, particularly to serve on our auditcommittee, and qualified executive officers. We cannot estimate the timing ormagnitude of additional costs we may incur as a result.

 

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

 

37

----

 

**Recent regulations related toequity compensation could adversely affect earnings, affect our ability toraise capital and affect our ability to attract and retain key personnel.**

 

Since our inception, wehave used stock options as a fundamental component of our employee compensationpackages. We believe that our stock option plans are an important tool to linkthe long-term interests of stockholders and employees, especially executivemanagement, and serve to motivate management to make decisions that will, inthe long run, give the best returns to stockholders. FASB has adopted changesto the U.S. GAAP that require us to record a charge to earnings for employeestock option 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 National 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 andbenefits we receive require us to satisfy prescribed conditions. These programsand benefits may be terminated or reduced in the future, which would increaseour costs and taxes and could seriously harm our business.**

 

Certain of our capitalinvestments have been granted “approved enterprise” status under Israeli lawproviding us with certain Israeli tax benefits. The benefits available to anapproved enterprise are conditioned upon the fulfillment of conditionsstipulated in applicable law and in the specific certificate of approval. If wefail to comply with these conditions, in whole or in part, we may be requiredto pay additional taxes for the period in which we enjoyed the tax benefits andwould likely be denied these benefits in the future. From time to time, thegovernment of Israel has considered reducing or eliminating the benefitsavailable under the approved enterprise program. These tax benefits may not becontinued in the future at their current levels or at all. The termination orreduction of these benefits would increase our taxes and could seriously harmour business. As of the date hereof, our Israeli subsidiaries, Vyyo Ltd. andXtend, have accumulated loss carry forwards for Israeli tax purposes andtherefore have not enjoyed any tax benefits under current approved enterpriseprograms.

 

In the past, we havereceived grants from the government of Israel for the financing of a portion ofour research and development expenditures for previous products in Israel. Theregulations under which we received these grants restrict our ability tomanufacture products or transfer technology outside of Israel for productsdeveloped with this technology. Furthermore, these grants may not be availableto us in the future.

 

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

 

**A majority of our directors and certainofficers have relationships****with DavidiGilo and his affiliated companies that could be deemed to limit theirindependence.**

 

A majority of our Boardof Directors, Lewis Broad, Neill Brownstein, Avraham Fischer, Samuel Kaplan andAlan Zimmerman and certain of our officers, have had professional relationshipswith Davidi Gilo, our Chief Executive Officer and Chairman of the Board, andhis affiliated companies for several years. These members of our Board ofDirectors previously served on the boards of directors of DSP Communications, Inc.and/or DSP Group, Inc., of which Mr. Gilo was formerly the controllingstockholder and the Chairman of the Board. In addition, Avraham Fischer is asenior partner of the law firm of Fischer, Behar, Chen & Co., whichrepresents us on matters relating to Israeli law, and is an investor andco-Chief Executive Officer of an Israeli investor group in which Mr. Gilo wasan investor until October 2005. There are no family relationships between thesedirectors and officers, and no member of our compensation committee serves as amember of the Board of Directors or compensation committee of any entity thathas one or more executive officers serving as a member of our Board ofDirectors or compensation committee. However, the long-term relationshipsbetween these directors and officers and Mr. Gilo and his affiliated companiescould be considered to limit their independence.

 

38

----

 

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

 

As of March 31, 2006, ourmanagement collectively owned approximately 31.8% of our outstanding commonstock (based on the number of shares owned by these individuals and the numberof shares issuable upon exercise of options within 60 days of March 31, 2006).

 

As a result, thesestockholders, acting together, will be able to control the outcome of allmatters submitted for stockholder action, including:

 

•              electingmembers to our Board of Directors;

 

•              approvingsignificant change-in-control transactions;

 

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

 

•              controllingour management and operations.

 

This concentration ofownership may have the effect of impeding a merger, consolidation, takeover orother business consolidation involving us, or discouraging a potential acquirerfrom making a tender offer for our shares. This concentration of ownershipcould also negatively affect our stock’s market price or decrease any premiumover market price that an acquirer might otherwise pay.

 

**We rely on a continuous powersupply to conduct our operations, and any electrical or natural resource crisiscould disrupt our operations and increase our expenses.**

 

We rely on a continuouspower supply for manufacturing and to conduct our business operations.Interruptions in electrical power supplies occur around the world from time totime. Meanwhile, prices of the resources, such as electrical power and crudeoil, upon which we ultimately rely, directly or indirectly, in running ourbusiness have been volatile. Power shortages, as have occurred in Californiaand China, could disrupt our manufacturing and business operations and those ofmany of our suppliers, and could cause us to fail to meet production schedulesand commitments to customers and other third parties. Any disruption to ouroperations or those of our suppliers could result in damage to our current and prospectivebusiness relationships and could result in lost revenue and additionalexpenses, thereby harming our business and operating results.

 

**Because the Nasdaq NationalMarket is likely to continue to experience extreme price and volumefluctuations, the price of our stock may decline.**

 

The market price of ourshares has been and likely will continue to be highly volatile and could besubject to wide fluctuations in response to numerous factors, including thefollowing:

 

•              actualor anticipated 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;

 

•              changesin financial estimates or recommendations by securities analysts;

 

•              changesin the market valuations of our competitors;

 

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

 

•              salesof our common stock.

 

Many of these factors arebeyond our control and may negatively impact the market price of our commonstock, regardless of our performance. In addition, the stock market in general,and the market for technology and telecommunications related companies inparticular, have been highly volatile. Our common stock may not trade at thesame levels compared to shares of other technology companies and shares oftechnology companies, in general,

 

39

----

 

may not sustain their current market prices. In the past, securitiesclass action litigation has often been brought against a company followingperiods of volatility in the market price of its securities. We could becomethe target of similar litigation in the future. Securities litigation couldresult in substantial costs and divert management’s attention and resources,which could seriously harm our business and operating results.

 

**Provisions of our governingdocuments and Delaware law could discourage acquisition proposals or delay achange in control.**

 

Our Fourth Amended andRestated Certificate of Incorporation and Amended and Restated Bylaws containanti-takeover provisions that could make it more difficult for a third party toacquire control of us, even if that change in control would be beneficial tostockholders. Specifically:

 

•              ourBoard of Directors has the authority to issue common stock and preferred stockand to determine the price, rights and preferences of any new series ofpreferred stock without stockholder approval;

 

•              ourBoard of Directors is divided into three classes, each serving three-yearterms;

 

•              supermajority voting is required to amend key provisions of our Fourth Amended andRestated Certificate of Incorporation and Amended and Restated Bylaws;

 

•              thereare limitations on who can call special meetings of stockholders;

 

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

 

•              advancenotice is required for nominations of directors and for stockholder proposals.

 

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

 

**It may be difficult to enforce ajudgment in the United States against us and our nonresident Chief FinancialOfficer and certain directors.**

 

Our Chief FinancialOfficer and two of our directors are not residents of the United States, and asubstantial portion of our assets and the assets of these persons are locatedoutside the United States. Therefore, it may be difficult to enforce a judgmentobtained in the United States based upon the civil or criminal liabilitiesprovisions of the United States federal securities laws against us or any ofthose persons or to effect service of process upon these persons in the UnitedStates.

 

**Item 2.****            UnregisteredSales of Equity Securities and Use of Proceeds**

 

OnMarch 23, 2006, we closed the private placement of $25,000,000 of common stock,a 10% Convertible Note, a 9.5% Senior Secured Note and Warrants to purchase298,617 shares of common stock. For a description of this Financing, includinga description of our expenses paid in connection with the Financing (whichincluded warrants to purchase common stock), see note 8 above. We relied uponRule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, asamended, for the exemption from registration of the sale of such securities.

 

40

----

 

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

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                        |
| 3.1                 |       | Fourth  Amended and Restated Certificate of Incorporation. Previously filed as an  exhibit to our Quarterly Report on Form 10-Q for the period ended March 31,  2005, and incorporated herein by reference. |
|                |       |                                                                                                                                                                                                        |
| 3.2                 |       | Amended  and Restated Bylaws. Previously filed as an exhibit to our Registration  Statement on Form S-1 (File No. 333-96129), and incorporated herein by  reference.                                        |
|                |       |                                                                                                                                                                                                        |
| 4.1                 |       | Reference  is made to Exhibits 3.1 and 3.2 above.                                                                                                                                                           |
|                |       |                                                                                                                                                                                                        |
| 10.1                |       | Equipment  Purchase Agreement between Vyyo Inc. and Arcadian Networks, Inc., dated March  31, 2006.*                                                                                                        |
|                |       |                                                                                                                                                                                                        |
| 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.                             |

 

----

*Confidential treatmenthas been requested for certain portions omitted from this exhibit pursuant toRule 24b-2 under the Securities Exchange Act of 1934, as amended. Confidentialportions of this exhibit have been separately filed with the Securities andExchange Commission.

 

41

----

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | Date: May 12, 2006 |                                                              |
|--------|--------------------|-------------------------------------------------------------------|
|   |               |                                                              |
|   |               |                                                              |
|   | **VYYO INC.**      |                                                              |
|   |               |                                                              |
|   |               |                                                              |
|   | By:                | /s/ Davidi Gilo                                                   |   |
|   |               |  Davidi Gilo,  Chief Executive Officer                       |   |
|   |               |  (Duly Authorized  Officer)                                  |   |
|   |               |                                                              |
|   |               |                                                              |
|   | By:                | /s/ Arik Levi                                                     |   |
|   |               |   Arik Levi,  Chief Financial Officer                        |   |
|   |               |   (Duly  Authorized Officer and Principal Financial Officer) |   |

 

42

----

 

**EXHIBITINDEX**

 
| **Exhibit****Number** | ** ** | **Exhibit**                                                                                                                                                                                                 |
|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                        |
| 3.1                   |       | Fourth  Amended and Restated Certificate of Incorporation. Previously filed as an  exhibit to our Quarterly Report on Form 10-Q for the period ended March 31,  2005, and incorporated herein by reference. |
|                  |       |                                                                                                                                                                                                        |
| 3.2                   |       | Amended  and Restated Bylaws. Previously filed as an exhibit to our Registration  Statement on Form S-1 (File No. 333-96129), and incorporated herein by  reference.                                        |
|                  |       |                                                                                                                                                                                                        |
| 4.1                   |       | Reference  is made to Exhibits 3.1 and 3.2 above.                                                                                                                                                           |
|                  |       |                                                                                                                                                                                                        |
| 10.1                  |       | Equipment  Purchase Agreement between Vyyo Inc. and Arcadian Networks, Inc. dated March  31, 2006.*                                                                                                         |
|                  |       |                                                                                                                                                                                                        |
| 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.                             |

 

----

*Confidential treatment has been requested forcertain portions omitted from this exhibit pursuant to Rule 24b-2 under theSecurities Exchange Act of 1934, as amended. Confidential portions of thisexhibit have been separately filed with the Securities and Exchange Commission.

 

43

----