**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

**x****                      ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe Quarterly Period Ended September 30, 2006**

**or**

**o****                         ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For thetransition period from             to**

**CommissionFile Number 000-30189**

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**VYYOINC.**

(Exact Name of Registrant asSpecified in Its Charter)

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

 

Registrant’sTelephone Number, Including Area Code **(678)282-8000**

**6625 The Corners Parkway, Suite 210**

**Norcross, Georgia 30092**

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

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

Large accelerated filer o      Acceleratedfiler o      Non-accelerated filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o   No x

As of November7, 2006, there were 18,106,346 shares of Common Stock outstanding.

 

 

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**INDEX**

**VYYO INC.**
|                                                                                                                                      | ** ** | **Page No.** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| PART I. FINANCIAL  INFORMATION                                                                                                       |       | 1                 |       |
|                                                                                                                                 |       |              |       |
| Item 1.  Condensed Consolidated Financial Statements                                                                            |       | 1                 |       |
|                                                                                                                                 |       |              |       |
| Condensed Consolidated  Balance Sheets at September 30, 2006 and December 31, 2005                                              |       | 1                 |       |
|                                                                                                                                 |       |              |       |
| Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2006 and September 30, 2005 |       | 2                 |       |
|                                                                                                                                 |       |              |       |
| Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2006 and  September 30, 2005           |       | 3                 |       |
|                                                                                                                                 |       |              |       |
| Notes to  Condensed Consolidated Financial Statements                                                                                |       | 4                 |       |
|                                                                                                                                 |       |              |       |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       | 17                |       |
|                                                                                                                                 |       |              |       |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                                             |       | 26                |       |
|                                                                                                                                 |       |              |       |
| Item 4. Controls  and Procedures                                                                                                |       | 26                |       |
|                                                                                                                                 |       |              |       |
| PART II. OTHER  INFORMATION                                                                                                          |       | 27                |       |
|                                                                                                                                 |       |              |       |
| Item 1A. Risk Factors                                                                                                                |       | 27                |       |
|                                                                                                                                 |       |              |       |
| Item 6. Exhibits                                                                                                                |       | 40                |       |
|                                                                                                                                 |       |              |       |
| SIGNATURES                                                                                                                           |       | 41                |       |

 

 

i

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

**Item 1.**                          CondensedConsolidated Financial Statements

**Vyyo Inc.Consolidated Balance Sheets(In thousands, except share data)**
| ** **                                                                                                                                                                                                        | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current Assets:**                                                                                                                                                                                               | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                            | 10,079     |                        | $          | 2,548 |   |
| Short-term  investments                                                                                                                                                                                           |       | 13,599                       |       | 7,403                       |       |
| Accounts  receivable, net (mainly from related party)                                                                                                                                                             |       | 1,001                        |       | 868                         |       |
| Inventory (note  2)                                                                                                                                                                                               |       | 2,810                        |       | 2,491                       |       |
| Other                                                                                                                                                                                                             |       | 1,251                        |       | 935                         |       |
| **Total  Current Assets**                                                                                                                                                                                         |       | 28,740                       |       | 14,245                      |       |
| ** **                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Long-Term Assets:**                                                                                                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Restricted cash  (note 4)                                                                                                                                                                                         |       | 5,000                        |       | 5,000                       |       |
| Property and  equipment, net                                                                                                                                                                                      |       | 1,095                        |       | 1,585                       |       |
| Employee rights  upon retirement funded (note 7)                                                                                                                                                                  |       | 1,127                        |       | 965                         |       |
| Debt issuance  costs, net (note 8)                                                                                                                                                                                |       | 1,114                        |       | —                      |       |
| **TOTAL  ASSETS**                                                                                                                                                                                                 |       | $                            | 37,076     |                        | $          | 21,795 |   |
| ** **                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current Liabilities:**                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Accounts payable                                                                                                                                                                                                  |       | $                            | 1,843      |                        | $          | 1,832 |   |
| Accrued  liabilities (note 6)                                                                                                                                                                                     |       | 11,634                       |       | 6,391                       |       |
| **Total  Current Liabilities**                                                                                                                                                                                    |       | 13,477                       |       | 8,223                       |       |
| ** **                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Long-Term Liabilities:**                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Promissory note  (note 4)                                                                                                                                                                                         |       | 4,774                        |       | 3,967                       |       |
| Senior secured  note (note 8)                                                                                                                                                                                     |       | 4,998                        |       | —                      |       |
| Convertible note  (note 8)                                                                                                                                                                                        |       | 10,101                       |       | —                      |       |
| Liability for  employee rights upon retirement (note 7)                                                                                                                                                           |       | 1,974                        |       | 1,460                       |       |
| **Total  Liabilities**                                                                                                                                                                                            |       | 35,324                       |       | 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,  18,096,344 and 15,721,334 shares issued and outstanding at September 30,  2006 and December 31, 2005, respectively |       | 259,816                      |       | 243,314                     |       |
| Notes receivable  from stockholders                                                                                                                                                                               |       | (19                          | )          | (19                         | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                             |       | (2                           | )          | —                      |       |
| Accumulated  deficit                                                                                                                                                                                              |       | (258,043                     | )          | (235,150                    | )          |
| **Total  Stockholders’ Equity**                                                                                                                                                                              |       | 1,752                        |       | 8,145                       |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                               |       | $                            | 37,076     |                        | $          | 21,795 |   |

 

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

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**VyyoInc.Condensed Consolidated Statements of Operations(In thousands, except per share data)(Unaudited)**
|                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **REVENUES**                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Revenues (note 11)                                       |       | $                                                    | 161        |                                                | $          | 225 |   | $ | 866 |   | $ | 2,081 |   |
| Revenues from  related party (notes 3 and 11)            |       | 953                                                  |       | —                                              |       | 5,378 |   | — |   |
| **TOTAL  REVENUES**                                      |       | 1,114                                                |       | 225                                                 |       | 6,244 |   | 2,081 |   |
|                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| **COST OF  REVENUES****(1)**                             |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of products sold                                    |       | 285                                                  |       | 2,153                                               |       | 655 |   | 4,194 |   |
| Cost of products sold, related party                     |       | 812                                                  |       | —                                              |       | 4,185 |   | — |   |
| Amortization of technology (note 5)                      |       | —                                               |       | 92                                                  |       | — |   | 276 |   |
| **Total Cost of Revenues**                               |       | 1,097                                                |       | 2,245                                               |       | 4,840 |   | 4,470 |   |
| **GROSS  PROFIT (LOSS)**                                 |       | 17                                                   |       | (2,020                                              | )          | 1,404 |   | (2,389 | ) |
| **OPERATING  EXPENSES (INCOME)****(2)**                  |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development                                 |       | 2,933                                                |       | 2,966                                               |       | 8,344 |   | 8,556 |   |
| Sales and marketing                                      |       | 2,080                                                |       | 2,248                                               |       | 7,294 |   | 8,039 |   |
| General and administrative                               |       | 2,233                                                |       | 1,442                                               |       | 7,634 |   | 4,790 |   |
| Amortization of intangible assets (note 5)               |       | —                                               |       | 356                                                 |       | — |   | 1,190 |   |
| Restructuring adjustments                                |       | —                                               |       | —                                              |       | — |   | (408 | ) |
| **Total Operating Expenses**                             |       | 7,246                                                |       | 7,012                                               |       | 23,272 |   | 22,167 |   |
| **OPERATING  LOSS**                                      |       | (7,229                                               | )          | (9,032                                              | )          | (21,868 | ) | (24,556 | ) |
| **INTEREST INCOME (EXPENSES), net**                      |       | (489                                                 | )          | 121                                                 |       | (1,103 | ) | 317 |   |
| **LOSS  FROM CONTINUING OPERATIONS**                     |       | (7,718                                               | )          | (8,911                                              | )          | (22,971 | ) | (24,239 | ) |
| **DISCONTINUED  OPERATIONS**                             |       | 48                                                   |       | —                                              |       | 78 |   | 365 |   |
| **LOSS  FOR THE PERIOD**                                 |       | $                                                    | (7,670     | )                                                   | $          | (8,911 | ) | $ | (22,893 | ) | $ | (23,874 | ) |
| **LOSS  PER SHARE**                                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted:**                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                    |       | $                                                    | (0.43      | )                                                   | $          | (0.57 | ) | $ | (1.33 | ) | $ | (1.58 | ) |
| Discontinued operations                                  |       | —                                               |       | —                                              |       | — |   | 0.02 |   |
|                                                     |       | $                                                    | (0.43      | )                                                   | $          | (0.57 | ) | $ | (1.33 | ) | $ | (1.56 | ) |
| **WEIGHTED  AVERAGE NUMBER OF SHARES**                   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and diluted                                        |       | 17,956                                               |       | 15,535                                              |       | 17,150 |   | 15,372 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| (1) Includes stock-based compensation               |       | $                                                    | 24         |                                                | $          | 4 |   | $ | 60 |   | $ | 4 |   |
| (2) Includes  stock-based compensation, as follows: |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development                                 |       | $                                                    | 228        |                                                | $          | 73 |   | $ | 667 |   | $ | 127 |   |
| Sales and marketing                                      |       | $                                                    | 426        |                                                | $          | 37 |   | $ | 1,200 |   | $ | 91 |   |
| General and administrative                               |       | $                                                    | 504        |                                                | $          | 13 |   | $ | 2,321 |   | $ | 13 |   |
| Restructuring  adjustments                               |       | —                                               |       | —                                              |       | — |   | $ | (408 | ) |

 

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

2

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**VyyoInc.Condensed Consolidated Statements of Cash Flows(In thousands)(Unaudited)**
| ** **                                                                                                           | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                                            | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Loss for the  period                                                                                                 |       | $                                                         | (22,893    | ) | $ | (23,874 | ) |
| Adjustments to  reconcile loss to net cash used in operating activities:                                             |       |                                                      |       |   |   |
| Income and expenses not involving cash flows:                                                                        |       |                                                      |       |   |   |
| Depreciation and amortization                                                                                        |       | 645                                                       |       | 2,224 |   |
| Accretion and amortization of financing instruments,  net                                                            |       | 1,043                                                     |       | — |   |
| Amortization and charge related to stock-based  compensation, net                                                    |       | 4,248                                                     |       | (173 | ) |
| Capital gain on sale of fixed assets                                                                                 |       | —                                                    |       | (2 | ) |
| Changes in assets and liabilities:                                                                                   |       |                                                      |       |   |   |
| Accounts receivable                                                                                                  |       | (133                                                      | )          | 172 |   |
| Other current assets                                                                                                 |       | (316                                                      | )          | (162 | ) |
| Inventory                                                                                                            |       | (319                                                      | )          | 1,106 |   |
| Accounts payable                                                                                                     |       | 11                                                        |       | 597 |   |
| Accrued liabilities                                                                                                  |       | 5,243                                                     |       | (1,225 | ) |
| Liability for employee rights upon retirement                                                                        |       | 514                                                       |       | 42 |   |
| Net cash used in  operating activities                                                                               |       | (11,957                                                   | )          | (21,295 | ) |
|                                                                                                                 |       |                                                      |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                                            | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                                                                  |       | (155                                                      | )          | (1,277 | ) |
| Proceeds from  sale of property and equipment                                                                        |       | —                                                    |       | 2 |   |
| Purchase of  short-term investments                                                                                  |       | (25,341                                                   | )          | (10,381 | ) |
| Proceeds from  sales and maturities of short-term investments                                                        |       | 19,143                                                    |       | 31,968 |   |
| Contributions of  severance pay funds                                                                                |       | (162                                                      | )          | (79 | ) |
| Net cash  provided by (used in) investing activities                                                                 |       | (6,515                                                    | )          | 20,233 |   |
|                                                                                                                 |       |                                                      |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                            | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Proceeds from  exercise of stock options                                                                             |       | 2,600                                                     |       | 383 |   |
| Proceeds from  issuance of common stock, senior secured note, convertible note and warrants,    net of issuance cost |       | 23,403                                                    |       | — |   |
| Proceeds from  notes receivable from stockholders                                                                    |       | —                                                    |       | 449 |   |
|                                                                                                                 |       |                                                      |       |   |   |
| Net cash  provided by financing activities                                                                           |       | 26,003                                                    |       | 832 |   |
|                                                                                                                 |       |                                                      |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                                    |       | 7,531                                                     |       | (230 | ) |
| Cash and cash  equivalents at beginning of period                                                                    |       | 2,548                                                     |       | 5,512 |   |
|                                                                                                                 |       |                                                      |       |   |   |
| Cash and cash  equivalents at end of period                                                                          |       | $                                                         | 10,079     |   | $ | 5,282 |   |
|                                                                                                                 |       |                                                      |       |   |   |
| Cash paid for interest                                                                                               |       | $                                                         | 610        |   | $ | 4 |   |

 

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

 

3

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** **

**Vyyo Inc.Notes to 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 under the Securities Exchange Act of 1934. Accordingly, they do not includeall of the information and notes required by GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals, reclassifications and adjustments) considered necessary fora fair presentation have been included. Operating results for the interimperiod are not necessarily indicative of the results that may be expected forthe full year. You should read these unaudited condensed consolidated financialstatements in conjunction with the audited consolidated financial statements inthe Annual Report on Form 10-K for the year ended December 31, 2005, filed byVyyo Inc. with the Securities and Exchange Commission (the “SEC”).

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

The consolidatedfinancial statements of Vyyo Inc. and its wholly-owned subsidiaries(collectively, the “Company”) are presented on a going concern basis, whichcontemplates the realization of assets and satisfaction of liabilities in thenormal course of business. The Company has experienced significant losses andnegative cash flows from operations since its incorporation. For the nine monthsended September 30, 2006, the Company incurred a net loss of $22,893,000 andhad an accumulated deficit of $258,043,000. These matters raise substantialdoubt about the Company’s ability to continue as a going concern. The Company’sability to continue as a going concern will depend upon its ability to raiseadditional capital during the next 12 months or attain profitable operations.The Company is actively pursuing raising additional capital to fund itsoperations although there is no assurance that such capital will be availableto the Company. In addition, the Company is seeking to expand its revenue baseby adding new customers and further reducing expenses. Failure to secureadditional capital or to expand its revenue base would result in the Companydepleting its available funds and not being able to pay its obligations whenthey become due. The accompanying condensed consolidated financial statementsdo not include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that may result from the possible inability of the Company tocontinue as a going concern. 

**Organizationand Principles of Consolidation**

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

The Company provides cable and wireless broadbandaccess solutions through two business segments: the “Cable Solutions” segmentand the “Wireless Solutions” segment. The Company’s products are designed toaddress four markets: Utility, Cable, Wireless Internet Service Providers(“WISP”) and Telecommunication Providers. Although the Company is engaged tovarious degrees in these distinct markets, some of the Company’s coretechnologies overlap with its solutions.

The Cable Solutions segment includes products that areused to deliver telephony and data T1/E1 links to enterprise and cellularproviders over cable’s wireless or hybrid-fiber coax (“HFC”) networks.Additionally, the Company’s “Spectrum Overlay” technology is designed to expandcable operators’ typical HFC network capacity in the “last mile” by up to twotimes in the downstream and up to four times in the upstream. The CableSolutions segment includes the results of operations of Xtend Networks Ltd., anIsraeli company, and its wholly-owned, U.S.-based subsidiary, Xtend NetworksInc. (collectively, “Xtend”). The Company purchased all of the outstandingcapital stock of Xtend on June 30, 2004 and consolidated its operations withthe Company’s operations beginning July 1, 2004.

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

The Company is focused on promoting products in theWireless Solutions segment into the network provider, utility, petrochemical,municipality and enterprise markets. The Company’s Cable Solutions segment isfocused on both promoting T1 solutions for business services over cablenetworks and promoting cable bandwidth expansion solutions that are designed toexpand cable operators’ typical HFC network capacity.

4

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**Summary of Significant Accounting Principles**

***Use of Estimates inthe Preparation of Financial Statements***

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

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

***Foreign CurrencyTransactions***

The U.S. dollar is the functional currency for theCompany and all of its sales are made in U.S. dollars. In addition, asubstantial portion of the Company’s foreign subsidiaries’ costs are incurredin U.S. dollars. Since the U.S. dollar is the primary currency in the economicenvironment in which the foreign subsidiaries operate, monetary accountsmaintained in currencies other than the U.S. dollar (principally cash andliabilities) are remeasured into U.S. dollars using the representative foreignexchange rate at the balance sheet date. Operational accounts and nonmonetarybalance sheet accounts are measured and recorded at the rate in effect at thedate of the transaction. The effects of foreign currency remeasurement arereported in current operations in the Statements of Operations under “InterestIncome (Expenses), net” and have not been material to date.

***Investments inMarketable Securities***

The Company has designated its investments in debtsecurities as available-for-sale. Available-for-sale securities are carried atfair value, which is determined based upon the quoted market prices of thesecurities, with unrealized gains and losses reported in “Accumulated othercomprehensive loss,” in the Balance Sheets, a component of stockholders’equity, until realized. Realized gains and losses and declines in value judgedto be other-than-temporary on available-for-sale securities are included in theStatements of Operations as part of “Interest Income (Expenses), 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 Balance Sheets under “Short-term investments,” even thoughthe stated maturity date may be one year or more from the current balance sheetdate. Interest, amortization of premiums, accretion of discounts and dividendson securities classified as available-for-sale are also included in theStatements of Operations as part of “Interest Income (Expenses), net.”

The Company recognizes an impairment charge when thedecline in the fair values of these investments below their cost basis isdeemed to be other-than-temporary. The Company considers various factors indetermining whether to recognize an impairment charge, including the length oftime and the extent to which the fair value has been below the cost basis, the currentfinancial condition of the investee and the Company’s intent and ability tohold the investment for a period of time sufficient to allow for anyanticipated recovery in market value. The Company recognized another-than-temporary impairment in its available-for-sale securities of $0 and$(42,000) for the three and nine months ended September 30, 2006, respectively,and $(9,000) and $126,000 for the three and nine months ended September 30,2005, respectively, and realized losses of $0 and $31,000 for the three and ninemonths ended September 30, 2006, respectively, and $0 for each of the three andnine months ended September 30, 2005.

***Cash Equivalents***

Cash equivalents are short-term, highly-liquidinvestments and deposits that have original maturities of three months or lessat the time of investment and that are readily convertible to cash.

***Inventory***

Inventory is stated at the lower of cost or market,where cost includes material and labor. The Company regularly monitorsinventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on the Company’s estimated forecast of future productdemand and production requirements. Although the Company makes every effort toensure the accuracy of its forecasts of future product demand, any significantunanticipated changes in demand or technological developments wouldsignificantly impact the value of the inventory and 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 revenues atthe time of such determination. If the Company’s inventory is determined to beundervalued, the Company may have overstated its cost of revenues in previousperiods and would be required to recognize additional operating income onlywhen the undervalued inventory was sold. During the three and nine months endedSeptember 30, 2006, the Company recorded an inventory valuation write-down ofapproximately $169,000. During the three and nine months ended September 30,2005, the Company 

5

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recordedan inventory valuation write-down of $1,700,000 and $2,050,000, respectively. The Company took these write-downs to account for excessinventory resulting from a slower than expected sales cycle and the Company’sincreased focus on providing products to utility and cable customers.

***Fair Value ofFinancial Instruments***

The fair value of the financial instruments includedin the Company’s working capital approximates carrying value. The PromissoryNote (described in note 4) and the Senior Secured Note and Convertible Note (eachas described in note 8) are presented in the Balance Sheets as “Long-TermLiabilities,” at their estimated fair value.

***Debt Issuance Costs***

Costs incurred in the issuance of the Convertible Noteand Senior Secured Note are deferred and amortized as a component of interestexpense over the period from issuance through the first redemption date.

***Property and Equipment***

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

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

***Intangible Assets***

During 2005, the Company recorded an impairment chargeof $11,388,000 for the full remaining carrying value of its intangible assets.The Company’s intangible assets in 2005 related to the acquisition of Xtend andconsisted of technology, non-competition agreements, an exclusive salesagreement and workforce. These definite-life intangible assets were amortizedusing the straight-line method over their estimated useful lives, rangingbetween one and six years. See also note 5.

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

Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”(“SFAS No. 144”), requires that long-lived assets, including definite lifeintangible assets to be held and used or disposed of by an entity, be reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. Under SFAS No. 144,if the sum of the expected future cash flows (undiscounted and without interestcharges) of the long-lived assets is less than the carrying amount, the Companywould recognize an impairment loss and would write down the assets to theirestimated fair values. See also note 5.

***Revenue Recognition***

Revenues from product sales are recognized when anarrangement exists, delivery has occurred and title has passed to the customer,the Company’s price to the customer is fixed or determinable and collectabilityis reasonably assured. When sales transactions include more then onedeliverable (unit of accounting) sold, the Company follows the guidance ofEmerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements withMultiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “RevenueRecognition.” Under the provisions in these statements, the Company separatesthe different units of accounting in sales with multiple deliverables based onthe objective and reliable evidence of fair value of the different elements.Revenue for each unit of accounting is then recognized when products aredelivered or when services are rendered or ratably over the contractual period,depending on the nature of the deliverable.

Revenues related to the exclusivity provisionscontained in the Equipment Purchase Agreement described in note 3 arerecognized over the 10-year term of that agreement.

The Company’s products are generally off-the-shelfproducts, sold “as is,” without further adjustment or installation. Salescontracts with distributors stipulate fixed prices and current payment termsand are not subject to the distributors’ resale or any other contingencies.Accordingly, when all criteria above are met, sales of finished products todistributors are recognized as revenue upon delivery and after title and riskpass to the distributors.

Generally,the Company does not grant any rights of return or cancellation to any of itscustomers. In sales where the Company grants the customer a right of return orcancellation, the Company recognizes revenue at such time when the customer hasaccepted the products and the right of return or cancellation has lapsed. 

In contracts wherethere is 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.

6

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***Product Warranty***

The Company provides for product warranty costs whenit recognizes revenue from sales of its products. The provision is calculatedas a percentage of sales, based on historical experience.

***Research andDevelopment Costs***

Research and development costs are expensed asincurred and consist primarily of personnel, facilities, equipment and suppliesfor research and development activities. Grants received from the Office of theChief Scientist at the Ministry of Industry and Trade in Israel and otherresearch foundations are deducted from research and development expenses as therelated costs are incurred.

***Loss Per Share ofCommon Stock***

Basic and diluted loss per share are calculated andpresented in accordance with SFAS No. 128, “Earnings per share.” For the threeand nine months ended September 30, 2006 and 2005, the following have beenexcluded from the calculation of diluted loss per share because all suchsecurities are anti-dilutive for the presented periods: 6,241,541 and5,929,490 outstanding stock options, respectively; 75,000 and 75,000 shares ofrestricted stock, respectively; and 79,559 and 0 warrants to purchase shares ofcommon stock, respectively.

***EmployeeStock-Based Compensation***

Until December 31, 2005, the Company accounted foremployee stock-based compensation in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. Charges for stock-based compensation represent theamortization of deferred compensation charges, which are based on aggregatedifferences between the respective exercise price of stock options, shares ofrestricted stock and purchase price of the underlying common stock on one handversus the fair market value of the common stock on the other hand. Deferredstock-based compensation is amortized over the vesting period of the underlyingstock options and the shares of restricted stock.

Under “fixed plan” accounting, compensation cost isfixed, measured at grant date and is not subsequently adjusted. Under “variableplan” accounting, the measurement date occurs after the grant date andcompensation cost is estimated and recorded each period from the grant date tothe measurement date, based on the difference between the option price and thefair market value of the underlying common stock at the end of each period.

As of January 1, 2006, the Company adopted SFAS No.123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), using themodified prospective method. This new standard requires measurement ofstock-based compensation cost for all stock-based awards at the fair value onthe grant date and recognition of stock-based compensation over the serviceperiod for awards that the Company expects will vest. The fair value of stockoptions is determined based on the number of shares granted and the price ofthe Company’s common stock, and calculated based on the Black-Scholes and thebinomial valuation models, which is consistent with the Company’s valuationtechniques previously utilized for options in footnote disclosures requiredunder SFAS No. 123, “Accounting for Stock Based Compensation,” as amended bySFAS No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure.” The Company recognizes such value as expense over the serviceperiod, net of estimated forfeitures, using the accelerated method under SFASNo. 123(R). Due to its adoption of SFAS No. 123(R), the Company no longer hasemployee stock-based compensation awards subject to variable accounting treatment.The cumulative effect of the Company’s adoption of SFAS No. 123(R), as ofJanuary 1, 2006, was not material.

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The fair value of each stock option granted during thethree and nine months ended September 30, 2006 and 2005 was estimated at the grantdate using the Black-Scholes and the binomial valuation models, using thefollowing assumptions:
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Black-Scholes  model assumptions:      |       |                                                 |       |                                                |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | 4.66%-5.10                                           | %          | 3.97                                                | %          | 4.66%-5.21 | % | 4.30 | % |
| Weighted-average  expected life range  |       | 2.50-5.00                                            |       | 3.40                                                |       | 2.50-5.00 |   | 3.92 |   |
| Volatility  ranges                     |       | 0.56-0.76                                            | %          | 0.57                                                | %          | 0.56-0.76 | % | 0.75 | % |
| Dividend yields                        |       | —                                               |       | —                                              |       | — |   | — |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Binomial  valuation model assumptions: |       |                                                 |       |                                                |       |   |   |   |   |
| Risk-free  interest rates ranges       |       | 4.95%-5.24                                           | %          | —                                              |       | 4.66%-5.33 | % | — |   |
| Weighted-average  expected life range  |       | 2.29-3.76                                            |       | —                                              |       | 2.29-5.00 |   | — |   |
| Volatility  ranges                     |       | 0.41%-0.86                                           | %          | —                                              |       | 0.41%-0.87 | % | — |   |
| Dividend yields                        |       | —                                               |       | —                                              |       | — |   | — |   |

 

The Company’s pro forma information for the three andthe nine months ended September 30, 2005 is as follow:
| ** **                                                                                          | ** ** | **Three Months Ended  September 30,**               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                                           | ** ** |
| ** **                                                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| Loss from  continuing operations as reported                                                        |       | $                                                                  | (8,911     | )                                                   | $          | (24,239 | ) |
| Add (deduct):  stock-based employee compensation income (expense) included   in reported loss       |       | 127                                                                |       | (173                                                | )          |
| Add: stock-based  employee compensation expense determined under fair value   method for all awards |       | (1,422                                                             | )          | (4,421                                              | )          |
| Pro forma loss  from continuing operations                                                          |       | $                                                                  | (10,206    | )                                                   | $          | (28,833 | ) |
| Income from  discontinued operations as reported                                                    |       | —                                                             |       | $                                                   | 365        |   |
| Pro forma income  from discontinued operations                                                      |       | —                                                             |       | 365                                                 |       |
| Pro forma loss                                                                                      |       | $                                                                  | (10,206    | )                                                   | $          | (28,468 | ) |
|                                                                                                |       |                                                               |       |                                                |       |
| Basic and  diluted loss per share:                                                                  |       |                                                               |       |                                                |       |
| As reported:                                                                                        |       |                                                               |       |                                                |       |
| Continuing operations                                                                               |       | $                                                                  | (0.57      | )                                                   | $          | (1.58 | ) |
| Discontinued operations                                                                             |       | —                                                             |       | 0.02                                                |       |
| Loss                                                                                                |       | $                                                                  | (0.57      | )                                                   | $          | (1.56 | ) |
|                                                                                                |       |                                                               |       |                                                |       |
| Pro forma:                                                                                          |       |                                                               |       |                                                |       |
| Continuing operations                                                                               |       | $                                                                  | (0.66      | )                                                   | $          | (1.87 | ) |
| Discontinued operations                                                                             |       | —                                                             |       | 0.02                                                |       |
| Loss                                                                                                |       | $                                                                  | (0.66      | )                                                   | $          | (1.85 | ) |

 

***Recent AccountingPronouncements***

In February 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments” (“SFAS No. 155”), which amends SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities”(“SFAS No. 133”), and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No.140”). SFAS No. 155 simplifies the accounting for certain derivatives embeddedin other financial instruments by allowing them to be accounted for as a wholeif the holder elects to account for the whole instrument on a fair value basis.SFAS No. 155 also clarifies and amends certain other provisions of SFASNo. 133 and SFAS No. 140. SFAS No. 155 is effective for all financialinstruments acquired, issued or subject to a remeasurement event occurring infiscal years beginning after September 15, 2006. The Company does notexpect adoption of SFAS No. 155 to have a material impact on itsconsolidated financial position, results of operations or cash flows.

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In June 2006, FASB issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109” (“FIN No. 48”). FIN No. 48 prescribes a recognitionthreshold and measurement attribute for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FINNo. 48 is effective for fiscal years beginning after December 15, 2006.The Company is currently assessing FIN No. 48 to determine the impact thatadoption will have on its results of operations and financial condition.

In June 2006, FASB issued EITF Issue No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation)”(“EITF 06-3”). EITF 06-3 requires disclosure of accounting policyregarding the gross or net presentation of point-of-sales taxes, such as salestax and value-added tax. If taxes included in gross revenues are significant,the amount of such taxes for each period for which an income statement ispresented also should be disclosed. EITF 06-3 will be effective for the firstannual or interim reporting period after December 15, 2006. The Company will beadopting EITF 06-3 beginning in the first quarter of fiscal year 2007. TheCompany does not expect adoption of EITF 06-3 to have a material impact on itsconsolidated financial position, results of operations or cash flows.

In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans—an amendment of FASB Statements No. 87,88, 106, and 132(R)” (“SFAS No. 158”). This standard requires employersto recognize the underfunded or overfunded status of a defined benefitpostretirement plan as an asset or liability in their statement of financialposition and to recognize changes in the funded status in the year in which thechanges occur through accumulated other comprehensive income. Additionally,SFAS No. 158 requires employers to measure the funded status of a plan as ofthe date of its year-end statement of financial position. The newreporting requirements and related new footnote disclosure rules of SFAS No.158 are effective for fiscal years ending after December 15, 2006. The newmeasurement date requirement applies for fiscal years ending after December 15,2008. The Company is currently assessing the impact that adoption of SFAS No.158 will have on its financial statements. 

In September 2006, FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”), which defines fair value, establishes aframework for measuring fair value in accordance with GAAP and expandsdisclosures about fair value measurements. SFAS No. 157 does not require anynew fair value measurements, but provides guidance on how to measure fair valueby providing a fair value hierarchy used to classify the source of theinformation. This statement is effective for the Company beginning July 1,2008. The Company is currently assessing the impact that adoption of SFAS No.157 will have on its financial statements.

***Reclassifications***

Certain amounts in the 2005 financial statements havebeen reclassified to conform to the 2006 presentation.

**2.****                                      Inventory**

Inventory is comprised of the following:
| ** **      | ** ** | **September 30, 2006** | ** **   | **December 31, 2005** | ** ** |
|-----------------|------------|----------------------------------|--------------|---------------------------------|------------|
| ** **      | ** ** | **(In thousands)**          | *** *** |
| Raw materials   |       | $                                | 880          |                            | $          | 488 |   |
| Work in process |       | 1,155                            |         | 415                             |       |
| Finished goods  |       | 775                              |         | 1,588                           |       |
|            |       |                             |         |                            |       |
|            |       | $                                | 2,810        |                            | $          | 2,491 |   |

 

**3.****                                      Agreementwith Arcadian Networks, Inc.**

On March 31, 2006, the Company entered into anEquipment Purchase Agreement (the “Purchase Agreement”) with Arcadian Networks,Inc. (“ANI”). Davidi Gilo, the Company’s Chief Executive Officer and Chairmanof the Board of Directors, is also the Chairman of the Board of Directors ofANI and the sole member of the limited liability company that is the generalpartner of a major stockholder of ANI. Avraham Fischer, a director of the Company, is co-chief executive officerand a director of Clal Industries and Investments, Ltd. (“Clal”), whichinvested $20,000,000 in ANI in August 2006. Mr. Fischer does not have an equity interest in Clal.

Pursuant to the Purchase Agreement, the Company sellscertain of its products and services to ANI over a 10-year term. The Companydistributes these products to ANI on an exclusive basis in the United States,Canada and the Gulf of Mexico (the “Relevant Territory”) to identified marketsif: (a) ANI makes two payments of $4,000,000 during each of the first twoyears of the Purchase Agreement; (b) ANI meets specified annual minimum productpurchase amounts; and (c) ANI’s outstanding balances are below

9

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 specified amounts.

Exclusivity after the second year will depend on ANI’smeeting the minimum purchase amounts. In addition, to maintain its exclusivityrights in the Purchase Agreement, ANI must purchase at least 25% of its minimumproduct purchase amounts within the first six months of any given year, and atleast 32% within the first six months of any given year if ANI purchases fromthird parties more than 15% of products with similar functionality to theproducts covered by the Purchase Agreement.

The Purchase Agreement fixes the product prices forthe first two years, after which time prices are subject to adjustmentaccording to the amount of product purchased by ANI compared to specifiedforecasted purchase amounts.

The Purchase Agreement does not prohibit the Companyfrom selling any of its products or services to areas outside of the RelevantTerritory. In addition, the Company may sell its products within the RelevantTerritory to end users or resellers other than those engaged in the followingmarkets: (a) electricity generation, transmission or distribution (bothdownstream and upstream); (b) oil or gas exploration, manufacture,transportation or distribution; (c) water utility; (d) chemical manufacture;(e) mining; (f) environmental monitoring or protection; (g) transportationfacilities (including railroads); (h) border control; and (i) public safety.Specifically, the Company may sell its products in the Relevant Territory tocable television customers.

The Company received the first exclusivity payment of$4,000,000 on April 3, 2006 and an initial purchase order for $10,000,000 onMarch 31, 2006, which satisfies ANI’s requirements for exclusivity in the firstyear of the Purchase Agreement.

For the three and nine months ended September 30,2006, the Company recognized revenue of $953,000 and $5,378,000, respectively,under the Purchase Agreement. Those revenues included sales of products, incomerelated to the exclusivity payment and product maintenance. The Company willrecognize the exclusivity payments from ANI over the 10-year term of thePurchase Agreement. As of  September 30,2006, ANI’s outstanding accounts receivable balance to the Company was$813,000.

**4.****                                      PromissoryNote Issued in Connection with Acquisition of Xtend**

On June 30, 2004, the Company acquired all of theoutstanding shares of Xtend. In connection with the acquisition, the Companyissued 1,398,777 shares of its common stock valued at $8,492,000, and made cashpayments of approximately $2,970,000 for non-competition agreements withcertain Xtend employees. In addition, the Company provided a promissory note inthe principal amount of $6,500,000 originally payable on March 31, 2007(the “Promissory Note”). On December 16, 2005, the Company amended key provisionsof the Promissory Note 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.

10

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As security for the amended Promissory Note, theCompany delivered to the holder a $5,000,000 letter of credit whereby theCompany deposited this $5,000,000 with a bank, and agreed to restrictions onthe deposit. This deposit is reflected in the Balance Sheets as “Restrictedcash.” The letter of credit will be cancelled if any time after June 30,2006, for 45 consecutive trading days, all of the following conditions exist:(a) the weighted average trading price of the Company’s common stock isequal to or higher than $18.00 per share; (b) the average daily tradingvolume of the Company’s common stock is higher than 150,000 shares per day; and(c) the holder is lawfully able to sell publicly in one transaction or ina series of transactions, during such 45 consecutive trading days, all of itsshares of the Company’s common stock without registration under the SecuritiesAct of 1933, as amended. If the Company’s consolidated revenues in the yearended December 31, 2006 equal or exceed $60,000,000 and the Company’sconsolidated gross margin equals or exceeds 35% during the same period, thePromissory Note will be canceled.

The Company determined that, as of the time it amendedthe Promissory Note and immediately prior to its amendment, the contingency hadbeen resolved and, therefore, the Company recorded $6,500,000 as additionalconsideration paid in the Xtend acquisition. This resulted in an increase inthe value of the intangible assets acquired. Following an impairment testperformed on the intangible assets, the assets were immediately impaired asdiscussed in note 5. In addition, the Company estimated the fair value ofthe amended Promissory Note at approximately $3,967,000 and recorded thisamount in its Balance Sheets as a long-term liability under “Promissory note.”The Company recorded a $2,533,000 difference between the value of the amendedPromissory Note and the original Promissory Note as “Gain Resulting fromAmendment to Promissory Note” in its Statements of Operations for the yearended December 31, 2005. Increases in the value of the amended Promissory Notewill be recorded as interest expenses up to $2,533,000 during the remainingterm of the Promissory Note unless it is cancelled as described above. For thethree and nine months ended September 30, 2006, the Company recorded anincrease of $286,000 and $807,000, respectively, in interest expenses relatedto the amended Promissory Note. 

**5.****                                      IntangibleAssets, Net**

The current focus of the Company’s Cable Solutionssegment is on the residential market of cable television multi-system operators(“MSOs”), rather than the commercial market of MSOs, the Company’s prior focusat the time of the Xtend acquisition. This change in focus has required 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 the intangible assets was estimatedby management with the assistance of an independent third party appraiser,based upon future expected discounted cash-flows as of December 31, 2005.Based on this appraisal, by using a weighted discounted cash flow model for theestimation of a fair value of group of assets, as set forth in SFASNo. 144, together with other facts and circumstances, the Company’smanagement recorded an impairment charge of $11,388,000 relating to the fullremaining carrying value of the intangible assets as of December 31, 2005.

Amortization of intangible assets acquired for thethree and nine months ended September 30, 2005 was $448,000 and $1,466,000,respectively, consisting of the amortization of existing technology (classifiedin the Statements of Operations as “Cost of Revenues”), of $92,000 and $276,000,respectively; non-competition agreements of $221,000 and $663,000,respectively; an exclusive sales agreement of $135,000 and $405,000,respectively; and workforce of $0 and $122,000, respectively.

In 2005, the Company amortized its intangible assetsusing the straight-line method over their estimated useful lives as 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.

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**6.****                                      AccruedLiabilities**

Accrued liabilities consist of the following:
| ** **                         | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(In thousands)**          | ** ** |
| Withholding tax                    |       | $                                | 3,279      |                            | $          | 2,582 |   |
| Compensation and  benefits         |       | 1,968                            |       | 1,812                           |       |
| Royalties                          |       | 930                              |       | 930                             |       |
| Warranty*                          |       | 35                               |       | 104                             |       |
| Legal and  professional fees       |       | 238                              |       | 192                             |       |
| Payment received  from insurer     |       | 206                              |       | —                          |       |
| Interest payable  to related party |       | 285                              |       | —                          |       |
| Deferred income                    |       | 3,913                            |       | —                          |       |
| Other                              |       | 780                              |       | 771                             |       |
|                               |       | $                                | 11,634     |                            | $          | 6,391 |   |

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*                    The changes inthe warranty balances consist of the following:

|                                                | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**                                       | ** ** |
| Balance at  beginning of period                |       | $                                                             | 104        |                                             | $          | 426 |   |
| Product warranty  issued for new sales         |       | 120                                                           |       | 133                                              |       |
| Changes in  accrual of warranty periods ending |       | (189                                                          | )          | (455                                             | )          |
| Balance at end of  period                      |       | $                                                             | 35         |                                             | $          | 104 |   |

 

**7.****                                      SeveranceLiabilities**

The amounts paid related to severance and severanceexpenses were:
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In thousands)**                              | ** ** | **(In thousands)**                             | ** ** |
| Amounts paid  related to severance |       | $                                                    | 193        |                                                | $          | 205 |   | $ | 867 |   | $ | 530 |   |
|                               |       |                                                 |       |                                                |       |   |   |   |   |
| Severance expenses*                |       | $                                                    | 224        |                                                | $          | 71 |   | $ | 1,186 |   | $ | 574 |   |

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*                                         Withrespect to its Israeli employees, the Company expects to contribute $269,000 toa defined contribution plan and $243,000 to insurance and pension plans for theyear ended December 31, 2006 (includes amounts contributed in the nine monthsended September 30, 2006).

**8.****                                      Financing**

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

The Convertible Note matures on March 22, 2011and accrues interest at a rate of 10% per annum, payable in cash quarterly inarrears, and is convertible at the holder’s option into shares of common stockat a conversion price of $10.00 per share, subject to adjustment. In the eventof a Fundamental Transaction (as defined in the Convertible Note), the holdermay, at its option, require the Company to redeem all or any portion of theConvertible Note at a price equal to 101% of the principal amount, plus allaccrued and unpaid interest, if any, and subject to specified conditions, maybe entitled to a “make-whole” premium calculated in accordance with the termsof the Convertible Note. Any default in the payment of interest or principalwill result in an increase in the interest rate by an additional 2% until thedefault is cured. In addition, holders of more than one-third of the aggregateprincipal balance then outstanding may declare all outstanding amountsimmediately due and payable upon the occurrence of any event of default. TheConvertible Note is unsecured and subordinate to the Company’s seniorindebtedness.

The Senior Secured Note matures on March 22, 2011and accrues interest at a rate of 9.5% per annum, payable in cash 

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quarterlyin arrears. The entire principal amount plus all accrued interest is payable atmaturity, unless earlier redeemed or repurchased. The Company has the option toprepay the Senior Secured Note in whole or in part, beginning March 22,2007, subject to payment of an applicable premium. In the event of aFundamental Transaction (as defined in the Senior Secured Note), the holder mayrequire that the Company redeem the entire Senior Secured Note at a price equalto 101% of the principal amount, plus all accrued and unpaid interest. Anydefault in the payment of interest or principal will result in an increase inthe interest rate by an additional 2% until the default is cured. In addition,holders of more than one-third of the aggregate principal balance thenoutstanding may declare all outstanding amounts immediately due and payableupon the occurrence of any event of default. In connection with the SeniorSecured Note, the Company also issued Warrants to purchase 298,617 shares ofcommon stock at an exercise price of $0.10 per share. Goldman, Sachs &Co. exercised these Warrants on March 24, 2006. The Senior Secured Note isa senior secured obligation of the Company and is secured by the Company’sassets and the intellectual property of certain of its subsidiaries, as setforth in the Guaranty and Security Agreement.

The Company allocated the proceeds received in theFinancing to the different instruments based on the relative fair value of eachinstrument as follows:
| ** **                                                               | ** ** | **Face value** | ** ** | **Relative fair 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 |   |

 

The Senior Secured Note and the Convertible Note netof the issuance costs will be accreted by up to $2,559,000 to their face valuesof $7,500,000 and $10,000,000, respectively, through their five-year term untilmaturity. The accretion will be recorded as interest expense.

The estimated issuance costs of the Financing wereapproximately $1,993,000 including (a) a $1,210,000 payment and issuance ofwarrants to purchase 79,559 shares of the Company’s common stock, at exerciseprices ranging from $0.10 to $10.00 (at an estimated fair value of $366,000),to the Company’s financial advisor and (b) accrual of approximately $417,000for legal and other professional fees and costs. Of these estimated issuancecosts, $806,000 and $385,000 were allocated to the Convertible Note and theSenior Secured Note, respectively. These costs will be amortized based on theeffective interest amortization method through the five-year term untilmaturity of the notes and recorded as interest expense, based on the effectiveinterest method of amortization.

The issuance costs described above were allocated tothe different instruments based on their relative fair values.

**9.****             Stock-BasedCompensation**

**Stock Option Plans**

The Company has the following stock option plans: the1999 Employee and Consultant Equity Incentive Plan and the Third Amended andRestated 2000 Employee and Consultant Equity Incentive Plan (the “2000 Plan”).The Company’s 1996 Equity Incentive Plan expired by its terms as of February 3,2006. The Company currently makes grants only from the 2000 Plan, which permitsthe grant of incentive stock options (“ISOs”) to employees, nonstatutory stockoptions to employees, directors and consultants and stock options which complywith Israeli law if granted to persons who are subject to Israel income tax.The 2000 Plan also provides for the awards of restricted stock and stockbonuses.

ISOs must have an exercise price equal to the fairvalue of the common stock on the grant date as determined by the Board ofDirectors. The period within which the option may be exercised is determined atthe time of grant, but may not be longer than 10 years. The number of sharesreserved under the 2000 Plan is subject to automatic annual increases on thefirst day of each fiscal year, equal to the lesser of 1,000,000 shares or 10%of the number of outstanding shares on the last day of the immediatelypreceding year.

On November 1, 2004, the Company entered into anat-will employment agreement with Xtend’s former chief executive officer underwhich he was granted an option to purchase 300,000 shares of the Company’scommon stock. In January 2005, he also was granted an option to purchase400,000 shares of the Company’s common stock. No compensation expense wasrecorded for these options as the fair value of the stock was not greater than theexercise price. Effective October 31, 2005, the employment of this officer wasterminated, and 25% of his outstanding options (175,000) were immediatelyvested. All remaining outstanding options were forfeited.

In August 2005, the Company granted certain employeesoptions to purchase 145,000 shares of the Company’s common

 

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stock at an exercise price of $0.10 per share. Themarket price 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 will vest on December 10, 2006with the remaining vesting on December 10, 2007.

In March 2005, the Company granted its Chairman of theBoard and Chief Executive Officer and certain executives 630,000 options topurchase shares of common stock for $7.50 to $10.50 per share. The options vestand become exercisable if the closing price of the Company’s common stock is ator above specified prices for 10 trading days out of any 30 consecutive tradingdays, so long as the optionee remains an employee of or consultant to theCompany on the 10th day of the period. The options expire five years after thegrant date, or, if earlier, 90 days after the optionee is no longer an employeeof or consultant to the Company. As of March 31, 2006, 75,000 of these stockoptions were forfeited as a result of the termination of an optionee’semployment. In the three and the nine months ended September 30, 2006, theCompany recorded expenses of $120,000 and $355,000, respectively, related tothese stock options.

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

**Restricted Stock**

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

In July 2004, the Company granted a former Xtendemployee 146,000 shares of restricted stock, of which 71,000 shares have vestedand 75,000 shares will vest subject to designated performance criteria. For thethree and nine months ended September 30, 2006, the Company did not recordcompensation expenses since the Company does not expect that performanceconditions related to the remaining restricted stock will be achieved.

**Grant of Stock Options to Davidi Gilo**

On February 10, 2006, the Company’s CompensationCommittee approved the grant to Mr. Gilo of options to purchase 900,000shares of the Company’s common stock. These options 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 recorded stock-based compensation expensesof $0 and $750,000 for the three and nine months ended September 30, 2006,respectively, related to the 300,000 options granted to Mr. Gilo that vestedupon the closing of the Financing. The Company also recorded stock-basedcompensation expenses of $56,000 and $143,000 for the three and nine monthsended September 30, 2006 in connection with the 600,000 stock options grantedto Mr. Gilo which vest based on the closing price of the Company’s commonstock. These stock-based compensation expenses were calculated based on thebinomial valuation method.

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A summary of stock option plans, shares of restricted stockand related information, under all of the Company’s equity incentive plans forthe year ended December 31, 2005 and the nine months ended September 30,2006 are as follows (in thousands, except per share data):
| ** **                     | ** ** | **Options/Shares  available for grants** | ** ** | **Number  outstanding** | ** ** | **Weighted average  exercise price** | ** ** | **Weighted average  fair value** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|--------------------------------------------|------------|
| Balance at  January 1, 2006    |       | 839                                                |       | 5,585                   |       | 5.35                                           |       | —                                     |       |
| Authorized                     |       | 1,000                                              |       | —                  |       | —                                         |       | —                                     |       |
| Granted*                       |       | (1,795                                             | )          | 1,795                   |       | 5.55                                           |       | 2.84                                       |       |
| Exercised                      |       | —                                             |       | (728                    | )          | 3.57                                           |       | —                                     |       |
| Expired plans                  |       | (39                                                | )          | —                  |       | —                                         |       | —                                     |       |
| Cancelled                      |       | 401                                                |       | (410                    | )          | 7.05                                           |       | —                                     |       |
| Balance at September  30, 2006 |       | 406                                                |       | 6,242                   |       | 5.50                                           |       | —                                     |       |

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*                    Includes98,750 options granted to non-employee directors in the nine months ended September30, 2006.

The following table summarizes information concerningoutstanding and exercisable options under stock option plans as of September 30,2006:
| ** **                                  | ** ** | **Options outstanding** | ** ** | **Options exercisable**                                | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------|------------|
| **Range of exercise prices** | ** ** | **Number  outstanding**      | ** ** | **Weighted average  remaining  contractual life** | ** ** | **Weighted average  exercise price  per share** | ** ** | **Number  exercisable** | ** ** | **Weighted average  exercise price  per share** | ** ** |
| ** **                                  | ** ** | **(In thousands)**      | ** ** | **(In years)**                                         | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Plans:                                      |       |                         |       |                                                        |       |   |   |   |   |   |   |
| 0.10                                        |       | 160                          |       | 3.99                                                        |       | $ | 0.10 |   | — |   | — |   |
| 0.99                                        |       | 2                            |       | 1.36                                                        |       | 0.99 |   | 2 |   | $ | 0.99 |   |
| 2.27 - 3.40                                 |       | 515                          |       | 2.17                                                        |       | 3.12 |   | 455 |   | 3.10 |   |
| 3.57 - 5.22                                 |       | 2,764                        |       | 5.01                                                        |       | 4.64 |   | 1,383 |   | 4.39 |   |
| 5.60 - 8.39                                 |       | 2,635                        |       | 3.92                                                        |       | 6.95 |   | 1,013 |   | 6.77 |   |
| 8.43 - 10.50                                |       | 166                          |       | 3.26                                                        |       | 9.52 |   | 32 |   | 9.12 |   |
|                                        |       | 6,242                        |       | 4.24                                                        |       | $ | 5.50 |   | 2,885 |   | $ | 5.07 |   |

 

As ofSeptember 30, 2006, the Company had issued approximately 6,241,541 options topurchase shares of common stock and had 405,821 shares of common stockavailable for issuance under it stock options plans.

**10.****          ComprehensiveLoss**

The components of comprehensive loss are as follows:
| ** **                                               | ** ** | **Three Months Ended  September 30,** | ** **   | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|--------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                             | ** **   | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                              | ** **   | **(In thousands)**                             | ** ** |
| Loss                                                     |       | $                                                    |  (7,670 | )                                                   | $          | (8,911 | ) | $ | (22,893 | ) | $ | (23,874 | ) |
| Unrealized gain  (loss) on available-for-sale securities |       | 7                                                    |         | 16                                                  |       | (2 | ) | 222 |   |
| Comprehensive loss                                       |       | $                                                    |  (7,663 | )                                                   | $          | (8,895 | ) | $ | (22,895 | ) | $ | (23,652 | ) |

 

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

Following the acquisition of Xtend, the Company’sbusiness is divided into two segments: “Wireless Solutions” and “CableSolutions.”
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** **   | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|--------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                             | ** **   | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                              | ** **   | **(In thousands)**                             | ** ** |
| Consolidated  revenues from:                                  |       |                                                 |         |                                                |       |   |   |   |   |
| Wireless Solutions, related party                             |       | $                                                    | 953          |                                                | —     |   | $ | 5,378 |   | — |   |
| Wireless Solutions                                            |       | —                                               |         | $                                                   | 82         |   | 166 |   | $ | 1,907 |   |
| Cable Solutions                                               |       | 161                                                  |         | 143                                                 |       | 700 |   | 174 |   |
| Consolidated  revenues                                        |       | $                                                    |  1,114  |                                                | $          | 225 |   | $ | 6,244 |   | $ | 2,081 |   |
|                                                          |       |                                                 |         |                                                |       |   |   |   |   |
| Operating loss  from continuing operations:                   |       |                                                 |         |                                                |       |   |   |   |   |
| Wireless Solutions                                            |       | (3,348                                               | )            | (5,652                                              | )          | (11,687 | ) | (13,651 | ) |
| Cable Solutions                                               |       | (3,881                                               | )            | (3,380                                              | )          | (10,181 | ) | (10,905 | ) |
| Total  consolidated operating loss from continuing operations |       | (7,229                                               | )            | (9,032                                              | )          | (21,868 | ) | (24,556 | ) |
| Interest income  (expenses), net                              |       | (489                                                 | )            | 121                                                 |       | (1,103 | ) | 317 |   |
| Loss from continuing  operations                              |       | $                                                    |  (7,718 | )                                                   | $          | (8,911 | ) | $ | (22,971 | ) | $ | (24,239 | ) |

 

The following provides information on the Company’sassets:

|                     | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **(In thousands)**          | ** ** |
| ** **          | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Wireless  Solutions |       | $                                | 35,194     |                            | $          | 19,935 |   |
| Cable Solutions     |       | 1,882                            |       | 1,860                           |       |
|                |       | $                                | 37,076     |                            | $          | 21,795 |   |

 
| ** **                               | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                   | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(In thousands)**                                    | ** ** | **(In thousands)**                             | ** ** |
| Expenditures for  long-lived assets:     |       |                                                       |       |                                                |       |   |   |   |   |
| Wireless  Solutions                      |       | $                                                          | 30         |                                                | $          | 67 |   | $ | 86 |   | $ | 275 |   |
| Cable Solutions                          |       | 36                                                         |       | 206                                                 |       | 69 |   | 1,002 |   |
|                                     |       | $                                                          | 66         |                                                | $          | 273 |   | $ | 155 |   | $ | 1,277 |   |
|                                     |       |                                                       |       |                                                |       |   |   |   |   |
| Depreciation and  amortization expenses: |       |                                                       |       |                                                |       |   |   |   |   |
| Wireless  Solutions                      |       | $                                                          | 92         |                                                | $          | 157 |   | $ | 304 |   | $ | 480 |   |
| Cable Solutions:                         |       |                                                       |       |                                                |       |   |   |   |   |
| Intangible assets                        |       | —                                                     |       | 448                                                 |       | — |   | 1,466 |   |
| Other assets                             |       | 112                                                        |       | 103                                                 |       | 341 |   | 278 |   |
|                                     |       | 112                                                        |       | 551                                                 |       | 341 |   | 1,744 |   |
|                                     |       | $                                                          | 204        |                                                | $          | 708 |   | $ | 645 |   | $ | 2,224 |   |

 

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The following is a summary of operations withingeographic areas based on the location of the customers:
| ** **                                                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                   | ** ** | **(In thousands)**                              | ** ** | **(In thousands)**                             | ** ** |
| Revenues from  sales to affiliated and unaffiliated customers from continuing operations in  the Wireless Solutions segment: |       |                                                 |       |                                                |       |   |   |   |   |
| North America,  related party                                                                                                |       | $                                                    | 953        |                                                | —     |   | $ | 5,378 |   | — |   |
| North America                                                                                                                |       | —                                               |       | $                                                   | 214        |   | 148 |   | $ | 1,476 |   |
| Asia                                                                                                                         |       | —                                               |       | 11                                                  |       | — |   | 549 |   |
| Rest of the  world                                                                                                           |       | —                                               |       | —                                              |       | 18 |   | 56 |   |
|                                                                                                                         |       | $                                                    |  953  |                                                | $          | 225 |   | $ |  5,544 |   | $ | 2,081 |   |
|                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Cable Solutions  segment:                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| North America                                                                                                                |       | $                                                    | 161        |                                                | —     |   | $ | 700 |   | — |   |

 

|                              | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**          | ** ** |
| Property and  equipment, net |       |                             |       |                            |       |
| Israel                       |       | $                                | 951        |                            | $          | 1,378 |   |
| United States                |       | 144                              |       | 207                             |       |
|                         |       | $                                | 1,095      |                            | $          | 1,585 |   |

 

Sales to major customers out of total revenues are asfollows:
| ** **                 | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                   | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Customer A,  related party |       | 85                                                         | %          | —                                              |       | 86 | % | — |   |
| Customer B                 |       | 14                                                         | %          | 9                                                   | %          | 11 | % | 1 | % |
| Customer C                 |       | 1                                                          | %          | 28                                                  | %          | 1 | % | 3 | % |
| Customer D                 |       | —                                                     |       | 20                                                  | %          | 1 | % | 47 | % |
| Customer E                 |       | —                                                     |       | 12                                                  | %          | 1 | % | 4 | % |
| Customer F                 |       | —                                                     |       | 16                                                  | %          | — |   | 2 | % |
| Customer G                 |       | —                                                     |       | 10                                                  | %          | — |   | 3 | % |

 

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

You should read this Management’s Discussion andAnalysis of Financial Condition and Results of Operations in conjunction withthe unaudited condensed consolidated financial statements and accompanyingnotes of Vyyo Inc. (collectively with its subsidiaries, “we,” “us” and “our”)appearing elsewhere in this Quarterly Report on Form 10-Q. The mattersaddressed in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations, with the exception of the historical informationpresented, contain forward-looking statements involving risks anduncertainties. 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 and wireless broadband accesssolutions through two business segments: the “Cable Solutions” segment and the“Wireless Solutions” segment. Our products are designed to address fourmarkets: Utility, Cable, Wireless Internet Service Providers (“WISP”) andTelecommunication providers. Although we are engaged to various degrees inthese distinct markets, some of our core technologies overlap with ourrespective solutions.

Our Cable Solutions segment includes products that areused to deliver telephony and data T1/E1 links to enterprise and cellularproviders over cable’s wireless or hybrid-fiber coax networks (“HFC”).Additionally, our “Spectrum Overlay” technology is designed 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

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outstanding capital stock of Xtend on June 30,2004 and consolidated its operations with our operations beginning July 1,2004. For a discussion of the Xtend acquisition, please refer to note 6 ofour 2005 annual Consolidated Financial Statements.

Our Wireless Solutions segment includes our utilityproducts which enable utilities and other network service providers to operateprivate wireless networks for communications, monitoring and SupervisoryControl And Data Acquisition (“SCADA”) of their geographically disbursed,remote assets. Additionally, it includes our WISP and telecommunicationsproducts which address the needs of rural service providers to serve customerswith wireless, high-speed data beyond the reach of traditional terrestrialnetworks.

We are focused on promoting products in our WirelessSolutions segment into the network provider, utility, petrochemical,municipality and enterprise markets. Our Cable Solutions segment is focused onboth promoting T1 solutions for business services over cable networks andpromoting cable bandwidth expansion solutions that are designed to expand cableoperators’ typical HFC network capacity.

We have incurred substantial losses since commencingoperations. For the nine months ended September 30, 2006, we incurred a netloss of $22,893,000 and had an accumulated deficit of $258,043,000. Thesematters raise substantial doubt about our ability to continue as a goingconcern. Our ability to continue as a going concern will depend upon ourability to raise additional capital during the next 12 months or attainprofitable operations. We are actively pursuing raising additional capital tofund our operations although there is no assurance that such capital will beavailable to us. In addition, we are seeking to expand our revenue base by addingnew customers and further reducing expenses. Failure to secure additionalcapital or to expand our revenue base would result in depleting our availablefunds and not being able to pay our obligations when they become due. See“Liquidity, Capital Resources and Going Concern Considerations.”

On March 23, 2006, we closed the private placement of$25,000,000 of common stock, a Convertible Note, a Senior Secured Note andWarrants to purchase common stock to Goldman, Sachs & Co. (“theFinancing”) resulting in net proceeds to us of approximately $23,400,000. Seenote 8 above for additional discussion of the Financing.

**Critical Accounting Principles**

 

The discussion and analysis of our financial conditionand results of operations is based upon our unaudited condensed consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates, judgments and assumptions thataffect the reported assets and liabilities, revenues and expenses and relateddisclosure of contingent assets and liabilities at the date of the financialstatements. Actual results may differ from these estimates, judgments andassumptions.

Our significant accounting principles are described inthe notes to our 2005 annual consolidated financial statements in the AnnualReport on Form 10-K for the year ended December 31, 2005. We determined thecritical principles by considering accounting principles that involve the mostcomplex or subjective decisions or assessments. We believe our most criticalaccounting principles include the following:

***Revenue Recognition***

Revenuesfrom product sales are recognized when an arrangement exists, delivery hasoccurred and title has passed to the customer, our price to the customer isfixed or determinable and collectability is reasonably assured. When salestransactions include more then one deliverable (unit of accounting) sold, wefollow the guidance of Emerging Issues Task Force (“EITF”) Issue 00-21,“Revenue Arrangements with Multiple Deliverables,” and Staff AccountingBulletin (“SAB”) SAB 104, “Revenue Recognition.” Under the provisions in thesestatements, we separate the different units of accounting in sales withmultiple deliverables based on the objective and reliable evidence of fairvalue of the different elements. We then recognize revenue for each unit ofaccounting when products are delivered or when services are rendered or ratablyover the contractual period, depending on the nature of the deliverable.

Revenues related to the exclusivity provisionscontained in the Equipment Purchase Agreement described in note 3 arerecognized over the 10-year term of that agreement.

Ourproducts are generally off-the-shelf products, sold “as is,” without furtheradjustment or installation. Sales contracts with distributors stipulate fixedprices and current payment terms and are not subject to the distributors’resale or any other contingencies. Accordingly, when all criteria above aremet, we recognize revenue from sales of finished products to distributors upondelivery and after title and risk pass to the distributors.

Generally, we do notgrant any rights of return or cancellation to any of our customers. In saleswhere the Company grants the customer a right of return or cancellation, werecognize revenue at such time when the customer has accepted the products andthe right of return or cancellation has lapsed. 

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In contracts where thereis a customer acceptance provision or there is uncertainty about customeracceptance, we defer the associated revenue until we have evidence of customeracceptance. We perform ongoing credit evaluations of our customers’ financialcondition and in some cases we require various forms of security.

 

***Inventory***

We regularly monitor inventory quantities on hand andrecord a provision for excess and obsolete inventory based primarily on ourestimated forecast of future product demand and production requirements.Although we make every effort to ensure the accuracy of our forecasts of futureproduct demand, any significant unanticipated changes in demand ortechnological developments would significantly impact the value of ourinventory and reported operating results. If actual market conditions differ fromour assumptions, additional provisions may be required. Our estimate of futureproduct demand may prove to be inaccurate, in which case we may haveunderstated or overstated the provision required for excess and obsoleteinventory. If we later determine that our inventory is overvalued, we would berequired to recognize such costs in our costs of sales at the time of suchdetermination. If we later determine that our inventory is undervalued, we mayhave overstated our costs of sales in previous periods and would be required torecognize additional operating income only when the undervalued inventory wassold. During the three and nine months ended September 30, 2006, we recorded aninventory valuation write-down of approximately $169,000.

***Employee Stock-Based Compensation***

Priorto January 1, 2006, we accounted for stock-based compensation under theintrinsic value method, which followed the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. Charges for stock-basedcompensation represented the amortization of deferred compensation charges,which was based on aggregate differences between the respective exercise priceof stock options, shares of restricted stock and purchase price of theunderlying common stock on one hand versus the fair market value of the commonstock on the other hand. Deferred stock-based compensation is amortized overthe vesting period of the underlying stock options and the shares of restrictedstock.

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, we adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-BasedPayment” (“SFAS No. 123(R)”), using the modified prospective method. This newstandard requires measurement of stock-based compensation cost for all stock-basedawards at the fair value on the grant date and recognition of stock-basedcompensation over the service period for awards that we expect will vest. Thefair value of stock options is determined based on the number of shares grantedand the price of our common stock, and calculated based on the Black-Scholesand the binomial valuation models, which is consistent with our valuationtechniques previously utilized for options in footnote disclosures requiredunder SFAS No. 123, “Accounting for Stock Based Compensation,” as amended bySFAS No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure.” We recognize such value as expense over the service period, net ofestimated forfeitures, using the accelerated method under SFAS No. 123(R). Dueto our adoption of SFAS No. 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 is included in the following lineitems in the Statements of Operations:
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                             | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(In thousands)**                              | ** ** | **(In thousands)**                       | ** ** |
| Cost of revenues            |       | $                                                    | 24         |                                          | $          | 4 |   | $ | 60 |   | $ | 4 |   |
| Research and  development   |       | $                                                    | 228        |                                          | $          | 73 |   | $ | 667 |   | $ | 127 |   |
| Sales and  marketing        |       | $                                                    | 426        |                                          | $          | 37 |   | $ | 1,200 |   | $ | 91 |   |
| General and  administrative |       | $                                                    | 504        |                                          | $          | 13 |   | $ | 2,321 |   | $ | 13 |   |
| Restructuring  adjustments  |       | —                                               |       | —                                        |       | — |   | $ | (408 | ) |

 

**RecentAccounting Pronouncements**

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFASNo. 155”), which amends SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”), and SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and

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Extinguishments of Liabilities” (“SFAS No. 140”). SFASNo. 155 simplifies the accounting for certain derivatives embedded in otherfinancial instruments by allowing them to be accounted for as a whole if theholder elects to account for the whole instrument on a fair value basis. SFASNo. 155 also clarifies and amends certain other provisions of SFAS No. 133 andSFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired,issued or subject to a remeasurement event occurring in fiscal years beginningafter September 15, 2006. We do not expect the adoption of SFAS No. 155 tohave a material impact on our consolidated financial position, results ofoperations or cash flows.

In June 2006, FASB issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes an interpretation of FASB StatementNo. 109” (“FIN No. 48”). FIN No. 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return, and also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN No. 48 is effectivefor fiscal years beginning after December 15, 2006. We are currentlyassessing the impact that adoption of FIN No. 48 will have on our resultsof operations and financial condition.

In June 2006, FASB issued EITF Issue No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation)”(“EITF 06-3”). EITF 06-3 requires disclosure of accounting policyregarding the gross or net presentation of point-of-sales taxes, such as salestax and value-added tax. If taxes included in gross revenues are significant,the amount of such taxes for each period for which an income statement is presentedshould also be disclosed. EITF 06-3 will be effective for the first annual orinterim reporting period after December 15, 2006. We will be adopting thispronouncement beginning in the first quarter of fiscal year 2007. We do notexpect adoption of EITF 06-3 to have a material impact on our consolidatedfinancial position, results of operations or cash flows.

In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans an amendment of FASB Statements No. 87,88, 106, and 132(R)” (“SFAS No. 158”). This standard requires  employers to recognize the underfunded oroverfunded status of a defined benefit postretirement plan as an asset orliability in their statement of financial position and to recognize changes inthe funded status in the year in which the changes occur through accumulatedother comprehensive income. Additionally, SFAS No. 158 requires employers tomeasure the funded status of a plan as of the date of its year-end statement offinancial position. The new reporting requirements and related new footnotedisclosure rules of SFAS No. 158 are effective for fiscal years ending afterDecember 15, 2006. The new measurement date requirement applies for fiscalyears ending after December 15, 2008. We are currently assessing the impactthat adoption of SFAS No. 158 will have on our financial statements.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”)*,*which defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS No. 157 does not require any new fair value measurements, but providesguidance on how to measure fair value by providing a fair value hierarchy usedto classify the source of the information. This statement is effective for usbeginning July 1, 2008. We are currently assessing the impact that adoption ofSFAS No. 157 will have on our financial statements.

## **Results ofOperations**

***Revenues***

Revenuesincreased to $1,114,000 in the three months ended September 30, 2006 from $225,000in the three months ended September 30, 2005, and to $6,244,000 in the nine monthsended September 30, 2006 from $2,081,000 in the nine months ended September 30,2005. This increase in revenues for the three and nine months ended September 30,2006 was primarily due to the $953,000 and $5,378,000, respectively, in revenuefrom our Wireless Solutions segment for products sold to Arcadian Networks,Inc. (“ANI”) and $161,000 and $700,000, respectively, in revenue from our CableSolutions segment for products sold primarily to a top five cable televisionmulti-system operator (“MSO”). ANI is a related party as discussed above innote 3. Revenues for the three and nine months ended September 30, 2006 and2005 did not include inventory previously written down to $0. 

Ourrevenue is concentrated among relatively few customers, as set forth in thefollowing table. Though our principal revenue-generating customers are likelyto vary on a quarterly basis, we anticipate that our revenues will remainconcentrated among a few customers for the foreseeable future.

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| ** **                 | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                   | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Customer A,  related party |       | 85                                                         | %          | —                                              |       | 86 | % | — |   |
| Customer B                 |       | 14                                                         | %          | 9                                                   | %          | 11 | % | 1 | % |
| Customer C                 |       | 1                                                          | %          | 28                                                  | %          | 1 | % | 3 | % |
| Customer D                 |       | —                                                     |       | 20                                                  | %          | 1 | % | 47 | % |
| Customer E                 |       | —                                                     |       | 12                                                  | %          | 1 | % | 4 | % |
| Customer F                 |       | —                                                     |       | 16                                                  | %          | — |   | 2 | % |
| Customer G                 |       | —                                                     |       | 10                                                  | %          | — |   | 3 | % |

 

***Cost of Revenues***

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

Costof revenues decreased to $1,097,000 during the three months ended September 30,2006 from $2,245,000 during the three months ended September 30, 2005, and was$4,840,000 and $4,470,000 in the nine months ended September 30, 2006 and 2005,respectively. The increase in cost of revenues in the nine months endedSeptember 30, 2006 compared to the same period in the prior year, was primarilyattributable to increased shipments of our products. For the three and ninemonths ended September 30, 2006, we recorded an inventory valuation write-downof approximately $169,000. For the three and nine months ended September 30,2005, we recorded an inventory valuation write-down of $1,700,000 and$2,050,000, respectively. Our gross margins for the three and nine months endedSeptember 30, 2006 increased compared to the same periods in the prior yearprimarily due to increased shipments of our products together with flat fixedcosts. We anticipate that our gross margin will continue to fluctuate based onour product and customer mix, revenue level and inventory valuations.

***Research and Development***

Ourresearch and development expenses were $2,933,000 and $2,966,000 during thethree months ended September 30, 2006 and 2005, respectively, and $8,344,000and $8,556,000 for the nine months ended September 30, 2006 and 2005, respectively.Approximately $1,715,000 and $1,541,000 of these expenses were from our CableSolutions segment for the three months ended September 30, 2006 and 2005,respectively, and $4,454,000 and $4,705,000 of these expenses were from ourCable Solutions segment for the nine months ended September 30, 2006 and 2005,respectively. Approximately $1,218,000 and $1,425,000 of these expenses werefrom our Wireless Solutions segment for the three months ended September 30,2006 and 2005, respectively, and $3,890,000 and $3,851,000 of these expenseswere from our Wireless Solutions segment for the nine months ended September30, 2006 and 2005, respectively. These expenses consisted primarily ofpersonnel, facilities, equipment and supplies and were charged to operations asincurred. We conducted all of our research and development activities in our Israelifacility.

Theincrease in our research and development expenses in our Cable Solutionssegment during the three months ended September 30, 2006 compared to the threemonths ended September 30, 2005 resulted mainly from increased purchases of materialof$469,000 compared to $392,000, respectively, and from non-cashexpenses related to stock option grants to our research and developmentemployees and consultants of $137,000 compared to $44,000, respectively. The decreasein our research and development expenses in our Cable Solutions segment duringthe nine months ended September 30, 2006 compared to the same period in theprior year mainly resulted from (a) decreased purchases of material of $926,000compared to $1,058,000, respectively, (b) decreased salaries and compensationof $226,000, due to our cost reduction program implemented in August 2005 and(c) decreased professional fees and other research and development expenses of$176,000. This decrease was partly offset by an increase in non-cash expensesrelated to stock option grants from $97,000 during the nine months endedSeptember 30, 2005 to $374,000 during the nine months ended September 30, 2006.

The decreasein our research and development expenses in our Wireless Solutions segmentduring the three months ended September 30, 2006 compared to the three monthsended September 30, 2005 mainly resulted from decreased purchases of material from$409,000 to $162,000. This decrease was partly offset by non-cash expensesrelated to stock option grants of $91,000 during the three months endedSeptember 30, 2006 compared to $29,000 during the same period in the previousyear. 

The increasein our research and development expenses in our Wireless Solutions segmentduring the nine months ended September 30, 2006 compared to the same period inthe prior year mainly resulted from (a) increased non-cash expenses related tostock option grants of $293,000 compared to $30,000, respectively, and (b) increasedpurchases of material of $748,000 from $700,000, respectively. This increasewas partly offset by a decrease of depreciation and other overhead expenses of$291,000 during the nine months ended September 30, 2006. We anticipate that wewill need to increase our research and development workforce in future periodsto meet our customer demands. 

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***Sales and Marketing***

Sales and marketing expenses decreased to $2,080,000 and$7,294,000 during the three and nine months ended September 30, 2006,respectively, compared to $2,248,000 and $8,039,000 during the three and ninemonths ended September 30, 2005, respectively. Sales and marketing expensesconsisted of salaries and related costs for sales and marketing employees,consulting fees and expenses for travel, trade shows, market research, brandingand promotional activities. The decrease in our sales and marketing expensesduring the three and nine months ended September 30, 2006 reflects ourdecreased workforce resulting from our cost reduction program implemented inAugust 2005.

Salesand marketing expenses for our Wireless Solutions segment were approximately$401,000 and $2,268,000 in the three and nine months ended September 30, 2006,respectively. For the three and nine months ended September 30, 2005, sales andmarketing expenses for our Wireless Solutions segment were $905,000 and$3,664,000, respectively. The decrease in the expenses for our WirelessSolutions segment in the three and nine months ended September 30, 2006resulted from the closings of our China office and our international salesdepartment during the three month ended June 30, 2005. During the three monthsended September 30, 2006 we continued the relocation of our wireless sales andmarketing support facilities from Palo Alto, California to Norcross, Georgia,and decreased our workforce. Given this reduction, we anticipate that our salesand marketing expenses of our Wireless Solutions segment will decrease infuture periods.

Salesand marketing expenses for our Cable Solutions segment were approximately $1,679,000and $5,026,000 during the three and nine months ended September 30, 2006,respectively, compared to $1,343,000 and $4,375,000 for the three and nine monthsended September 30, 2005, respectively. The increase during the three monthsended September 30, 2006 resulted mainly from increased charges for stock-basedcompensation of approximately $364,000 compared to approximately $37,000 duringthe three months ended September 30, 2005, and an increase in our professionalfees of approximately $107,000 compared to approximately $36,000 during thethree months ended September 30, 2005. This increase was partly offset by adecrease in our expenses for public relations from $55,000 to $14,000 duringthe three months ended September 30, 2006 compared to the same period in 2005.

Theincrease in sales and marketing expenses for our Cable Solutions segment duringthe nine months ended September 30, 2006 resulted mainly from increased chargesfor stock-based compensation of approximately $1,087,000 compared toapproximately $91,000 during the nine months ended September 30, 2005, and anincrease in our professional fees of approximately $392,000 compared toapproximately $245,000 during the nine months ended September 30, 2005. Thisincrease was partly offset by decreases in our salaries, compensation andreduced employee recruitment expenses of $248,000 for the nine months endedSeptember 30, 2006 compared to the same period in 2005. In addition, weincurred a one-time expense of $200,000 in June 2005 for market research thatwe have not incurred in 2006.

Weanticipate that our sales and marketing workforce will increase in futureperiods as we increase our efforts to penetrate the cable market and meet ourcustomer demands.

***General and Administrative***

Generaland administrative expenses increased to $2,233,000 during the three monthsended September 30, 2006 compared to $1,442,000 during the three months endedSeptember 30, 2005, and to $7,634,000 during the nine months ended September30, 2006 compared to $4,790,000 during the nine months ended September 30,2005. Of these expenses, approximately $443,000 and $1,015,000 were from ourCable Solutions segment, and $1,790,000 and $6,619,000 were from our WirelessSolutions segment during the three and nine months ended September 30, 2006,respectively. This compares to $190,000 and $534,000 from our Cable Solutionssegment and $1,252,000 and $4,256,000 from our Wireless Solutions segmentduring the three and nine months ended September 30, 2005, respectively.General and administrative expenses consisted primarily of personnel andrelated costs for general corporate functions, including finance, accounting,implementation of the Sarbanes-Oxley Act of 2002, strategic and businessdevelopment and legal.

Theincrease in general and administrative expenses during the three months ended September30, 2006 compared to the three months ended September 30, 2005 was primarilydue to (a) an increase of $491,000 in our non-cash stock-based compensationcharges, (b) an increase in our withholding tax expenses of approximately $125,000and (c) an increase of $260,000 in salaries. These increases were partly offsetby a decrease of $128,000 in fees paid to consultants and a decrease in travelexpenses of approximately $63,000. The increase in general and administrativeexpenses during the nine months ended September 30, 2006 compared to the ninemonths ended September 30, 2005 resulted from (a) an increase of $2,308,000 inour non-cash stock-based compensation charges and (b) an increase of $873,000in salaries and severance compensation primarily related to the relocation ofour Wireless Solutions segment and Corporate offices from Palo Alto, Californiato Norcross, Georgia and a one-time severance provision of $300,000 inconnection with the new employment agreement of our Chief Executive Officer andChairman of our Board of Directors. These increases were partly offset by adecrease in travel expenses of approximately $737,000forthe nine months ended September 30, 2006 compared to the same period in 2005.

Weexpect general and administrative expenses to 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. We

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will complete the consolidation of our United Stateslocations in the fourth quarter of 2006. We expect that the one-time increasesin general and administrative expenses due to relocation expenses and personnelchanges will be offset by reduced facility charges.

***Amortization of Intangible Assets***

Amortizationof intangible assets acquired was $0 and $448,000 during the three months endedSeptember 30, 2006 and 2005, respectively, and $0 and $1,466,000 during the ninemonths ended September 30, 2006 and 2005, respectively. We estimated the fairvalue of our intangible assets with the assistance of an independent thirdparty appraiser, based upon future expected discounted cash-flows as ofDecember 31, 2005. Based on this appraisal, by using a weighted discounted cashflow model for the estimation of a fair value of group of assets as set forthin SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” together with other facts and circumstances, we recorded an impairmentcharge of $11,388,000 related to the full remaining carrying value of theintangible assets as of December 31, 2005. Therefore, we did not amortizeintangible assets during the three and nine months ended September 30, 2006.

Amortizationof intangible assets acquired for the three and nine months ended September 30,2005 consisted of the amortization of existing technology of $92,000 and $276,000,respectively (recorded in our Statements of Operations as “Cost of Revenues”);non-competition agreements of $221,000 and $663,000, respectively; an exclusivesales agreement of $135,000 and $405,000, respectively; and workforce of $0 and$122,000, respectively. For additional information, see notes 6 and 7 of our2005 annual consolidated financial statements included in our Annual Report onForm 10-K.

***Restructuring Charges***

In2001, we implemented a restructuring program to reduce operating expenses dueto the dramatic and continuing slowdown in the telecommunications sector andthe general economy. In connection with this program, we recorded restructuringincome of $0 and $408,000 during the three and nine months ended September 30,2005, respectively, from a positive adjustment with respect to a variablecompensation plan related to our former chief executive officer.

As ofDecember 31, 2005, there were no severance expenses or termination ofcontractual obligations payments attributable to the restructuring. Therefore,no restructuring charges were recorded during the three and nine months ended September30, 2006.

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

Interest income (expense), net includes interest andinvestment income, foreign currency remeasurement gains and losses. Netinterest expense was $489,000 and $1,103,000 for the three and nine monthsended September 30, 2006, respectively, compared to net interest income of $121,000and $317,000 for the three and nine months ended September 30, 2005,respectively. Net interest expense increased due to increased interest on ouramended Promissory Note, 10% Convertible Note and 9.5% Senior Secured Note.These increases were partially offset by interest income derived mainly fromour cash and short-term investment balances, and recognition of another-than-temporary impairment in our available-for-sale securities of $0 and$(42,000), respectively, and realized losses of $0 and $31,000, respectively, forthe three and nine months ended September 30, 2006. During the three monthsended September 30, 2005, we recorded an other-than-temporary investment impairmentof $126,000 given that we did not hold the debt securities for a reasonabletime 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%, plus the amortization of deferred expenses incurred aspart of the Financing. We will expense accretion of $3,515,000 over the termsof the long-term debt. 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. We will record accretion of $1,726,000 throughout theterm of the amended Promissory Note, unless the note is cancelled.

***Income Taxes***

As ofDecember 31, 2005, our Israeli subsidiaries had net operating losscarryforwards of approximately $90,000,000. These carryforwards have noexpiration date.

OurIsraeli subsidiaries have been granted “Approved Enterprise” status for severalinvestment programs. The “Approved Enterprise” status entitles thesesubsidiaries to receive tax exemption periods, ranging from two to six years,on undistributed earnings commencing in the year in which the subsidiariesattain taxable income. In addition, this “Approved Enterprise” status providesa reduced corporate tax rate of between 10% to 25% (as opposed to the usualIsraeli corporate tax rate of 31% for 2006) for the remaining term of theprogram on the plan’s proportionate share of income.

Sinceour Israeli subsidiaries have not achieved taxable income, the tax benefitsperiods have not yet commenced. The subsidiaries’ losses are expected to offsetcertain future earnings of the subsidiaries during the tax-exempt period;therefore, the utilization of the net operating losses will generate no taxbenefits. Accordingly, deferred tax assets from such losses have not beenincluded in our 2005 annual consolidated financial statements or our September 30,2006 unaudited condensed consolidated financial

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statements. The entitlement to the above benefits isconditioned upon the subsidiaries fulfilling the conditions stipulated by thelaw, regulations published thereunder and the instruments of approval for thespecific investments in approved enterprises.

***Discontinued Operations***

On August 12, 2003, our Board of Directors determinedto cease the software business operated by Shira Computers Ltd. (“Shira”), theCompany’s wholly owned subsidiary, and terminate all of Shira’s employees dueto the continuing decline in Shira’s sales, Shira’s recurring losses and itsinability to penetrate the market. On March31, 2005, we sold all of our shares of Shira to third parties. Under the saleagreement, the purchasers must pay us 22.5% to 42.5% of the proceeds that theyreceive upon a later sale of Shira or its assets. The purchasers haveassumed all of Shira’s liabilities totaling $270,000. The gain from this sale was $290,000 and was recorded in discontinuedoperations.

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

Our financialstatements are presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness. We have experienced significant losses and negative cash flows fromoperations since incorporation. For the nine months ended September 30, 2006,we incurred a net loss of $22,893,000 and had an accumulated deficit of $258,043,000.Thisraises substantial doubt about our ability to continue as a going concern. Ourability to continue as a going concern will depend upon our ability to raiseadditional capital during the next 12 months or attain profitable operations.We are actively pursuing raising additional capital to fund our operationsalthough there is no assurance that such capital will be available to us. Inaddition, we are seeking to expand our revenue base by adding new customers andfurther reducing expenses. Failure to secure additional capital or to expandour revenue base would result in depleting our available funds and not beingable to pay our obligations when they become due. The accompanying condensedconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from our possibleinability to continue as a going concern.

As of September30, 2006, we had $23,678,000 of cash, cash equivalents and short-terminvestments. During the nine months ended September 30, 2006, net cash used inoperations was $11,957,000, comprised mainly of our loss of $22,893,000 partiallyoffset by (a) non-cash charges related to depreciation and amortization of $645,000and stock-based compensation of $4,248,000, (b) a $514,000 increase inliability for employee rights upon retirement, (c) $1,043,000 of accretion andamortization of financing instruments, net and (d) changes in other workingcapital accounts of $4,486,000. During the nine months ended September 30,2005, net cash used in operations was $21,295,000, comprised mainly of (a) ourloss of $23,874,000, (b) changes in other working capital accounts of $528,000,and (c) non-cash charges of income related to stock-based compensation of $173,000partially offset by non-cash charges of depreciation and amortization of $2,224,000.

Duringthe nine months ended September 30, 2006, net cash used in investing activitieswas $6,515,000, comprised mainly of the purchase of $6,198,000 of short-terminvestments, net of sales and maturities of our short-term investments. Duringthe nine months ended September 30, 2005, net cash provided by investingactivities was $20,233,000, comprised of $21,587,000 net of sales and purchasesof our short-term investments partially offset by $1,277,000 in purchases ofproperty and equipment.

Financingactivities in the nine months ended September 30, 2006 were approximately $26,003,000related to (a) the Financing, which included the issuance of our common stock,9.5% Senior Secured Note, 10% Convertible Note and Warrants to purchase ourcommon stock, net of issuance costs and (b) proceeds from stock optionexercises. See note 8 above for additional information about the Financing.Financing activities in the nine months ended September 30, 2005 wereapproximately $832,000 consisting of proceeds from stock option exercises andnotes receivables from stockholders.

Ourcapital requirements depend on numerous factors, including market acceptance ofour products, the resources we devote to developing, marketing, selling andsupporting our products and other factors. During the next 12 months, we will needto raise additional capital to execute our business plan and to provideadequate working capital to satisfy our business objectives and requirements.If we raise additional funds through the issuance of equity or convertible debtsecurities, we may be required to do so at a price per share below then-currenttrading prices thereby diluting our current stockholders. We may not be able toobtain additional funds on acceptable terms, or at all. This potentialinability to raise funds on acceptable terms could seriously harm our business.If we cannot raise needed funds on acceptable terms, we may not be able toexecute our business plan or to continue as a going concern.

Wehave purchase obligations to our suppliers that support our operations in thenormal cause of our business. The obligations require us to purchase minimumquantities of the suppliers’ products at a specified price. As of December 31,2005 and September 30, 2006, we had approximately $1,538,000 and $2,106,000 ,respectively, of purchase obligations. These obligations are expected to becomepayable at various times through 2006.

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**Forward-Looking Statements**

Youshould read Management’s Discussion and Analysis of Financial Condition andResults of Operations in conjunction with the consolidated financial statementsand accompanying notes appearing elsewhere in our Quarterly Report on Form10-Q. The matters addressed in 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, as well as assumptions that, if they do not fullymaterialize or prove incorrect, could cause our business and results ofoperations to differ materially from those expressed or implied by suchforward-looking statements. Such forward-looking statements include:

·                     our belief that our ability to continue as agoing concern will depend upon our ability to raise additional capital duringthe next 12 months or attain profitable operations;

·                     our belief that failure to secure additionalcapital or to expand our revenue base would result in depleting our availablefunds and not being able to pay our obligations when they become due;

·                     ourbelief that our most critical accounting principles include principles relateto revenue recognition, inventory and employee stock-based compensation;

·                  our expectation that adoption of SFAS No. 155or EITF 06-3 will not have a material impact on our consolidated financialposition, results of operations or cash flows;

·                  our expectation that a few customers will account fora large percentage of our revenues;

·                  our expectation that our gross margins will continueto fluctuate based on our product and customer mix, revenue level and inventoryvaluations;

·                  our expectation that we will need to increase ourresearch and development workforce in future periods to meet our customerdemands;

·                  our expectation that expenses of our WirelessSolutions segment will decrease in future periods;

·                  our expectation that our sales and marketingworkforce will increase in future periods as we increase our efforts topenetrate the cable market and meet our customer demands;

·                  our expectation that general and administrativeexpenses will be higher in the future as we continue to implement internalcontrols over financial reporting as required by the Sarbanes-Oxley Act and toexecute our strategic plans and business development efforts;

·                  our expectation that the one-time increases ingeneral and administrative expenses due to relocation expenses and personnelchanges incurred in the consolidation of our United States locations will beoffset by reduced facility charges;

·                  our expectation that we will incur increasedinterest expenses for the remainder of 2006 and beyond;

·                  our expectation that the losses of our Israelisubsidiaries will offset certain future earnings of the subsidiaries duringtheir tax-exempt period and that, therefore, we will receive no tax benefitsfrom the utilization of the net operating losses;

·                  our belief that we will need additional capital toexecute our business plan and to provide adequate working capital to satisfyour business objectives and requirements;

·                  our belief that if we raiseadditional funds through the issuance of equity or convertible debt securities,we may be required to do so at a price per share below then-current tradingprices thereby diluting our current stockholders;

·                  our belief that we may not be able to obtainadditional funds on acceptable terms, or at all;

·                  our belief that if we cannot raise additional fundson acceptable terms, we may not be able to execute our business plan or tocontinue as a going concern; and

·                  our belief as to the purchase obligations that areexpected to become payable at various times through 2006.

Youcan identify these and other forward-looking statements by the use of wordssuch as “may,” “will,” “should,” “could,” “intend,” “expect,” “plan,” “estimate,”“project,” “anticipate,” “believe,” “potential,” “continue,” or the negative ofsuch terms, or other comparable terminology. The risks, uncertainties andassumptions referred to above that could cause our actual results to differmaterially from the results expressed or implied by such forward-lookingstatements include those set forth under Item 1A below and the risks,uncertainties and assumptions discussed from time to time in our other publicfilings and public announcements. All 

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forward-looking statements included in this documentare based on information available to us as of the date hereof, and we assumeno obligation to update these forward-looking statements.

**Item3.**                          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 IsraeliShekels, or NIS. We have not engaged in hedging transactions to reduce ourexposure to fluctuations that may arise from changes in foreign exchange rates.In the event of an increase in inflation rates in Israel, or if appreciation ofthe NIS occurs without a corresponding adjustment in our dollar-denominatedrevenues, our results of operation and business could be materially harmed.***

***As of September 30, 2006, we hadcash, cash equivalents and short-term investments of $23,678,000. Substantiallyall of these amounts consisted of corporate and government fixed incomesecurities and money market funds that invest in corporate and government fixedincome securities that are subject to interest rate risk. We place ourinvestments with high credit quality issuers and by policy limit the amount ofthe credit exposure to any one issuer.***

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

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

**QuantitativeInterest Rate Disclosure as of September 30, 2006**

***If market interest rates were to increase on September 30,2006 immediately and uniformly by 10%, the fair value of the portfolio woulddecline by approximately $33,000, or approximately 0.2% of the total portfolio(approximately 0.1***% oftotal assets). Assuming that the average yield to maturity on our portfolio atSeptember 30, 2006 remains constant throughout the fourth quarter of 2006 andassuming that our cash, cash equivalents and short-term investments balances atSeptember 30, 2006 remain constant for the duration of the fourth quarter of2006, interest income for the fourth quarter of 2006 would be approximately $235,000.Assuming a decline of 10% in the market interest rates at September 30, 2006,interest income for the fourth quarter of 2006 would be approximately $241,000,which represents an increase in interest income of approximately $6,000. Theincrease in interest income will result in an increase of the same amount tonet income and cash flows from operating activities for the nine months endedSeptember 30, 2006. These amounts are determined by considering the impact ofthe hypothetical interest rates on our cash equivalents and available-for-salesecurities at September 30, 2006 over the remaining contractual lives.

**Item4.**                          Controlsand Procedures

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of our disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) as of the end of the periodcovered by this report. Based on such evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of such period,our disclosure controls and procedures were effective to ensure thatinformation we are required to disclose in reports that we file under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission rules and forms.

There have not been anychanges in our internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during thefiscal quarter to which this report relates that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

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**PARTII.**               OTHERINFORMATION

**Item1A.**                 RiskFactors

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

**We willneed to raise additional capital in the near future, and if we are unable totimely secure adequate funds on terms acceptable to us, we may not be able toexecute our business plan or to continue as a going concern.**

Notwithstanding the closing of our Financing withGoldman, Sachs & Co. on March 23, 2006, which resulted in net proceeds tous of approximately $23,400,000, we will need to raise additional capitalduring the next 12 months to continue as a going concern and to execute ourbusiness plan and provide adequate working capital to satisfy our businessobjectives and other requirements. If we raise additional funds through theissuance of equity or convertible debt securities, we may be required to do soat a price per share below then-current trading prices thereby diluting ourcurrent stockholders. We may not be able to obtain funds on acceptable terms,or at all. This potential inability to raise funds on acceptable terms couldseriously harm our business. If we cannot raise needed funds on an acceptableterms, we may not be able to execute our business plan or to continue as agoing concern.

**We have ahistory of significant losses, expect future losses and may never achieve orsustain profitability.**

We have incurred significant losses since ourinception, and we expect to continue to incur losses for the foreseeablefuture. We incurred losses of $22,893,000 for the nine months ended September30, 2006. As of September 30, 2006, our accumulated deficit was $258,043,000.Our revenues and gross margins may not grow or even continue at their currentlevel and may decline even further. If our revenues do not rapidly increase, orif our expenses increase at a greater pace than our revenues, we will neverbecome profitable.

**We havewritten down and may need to further record inventory valuation write-downs inthe future if our sales levels do not match our expectations, or if sellingprices decline more than we anticipate, which could adversely impact ouroperating results.**

We operate in an industry that is characterized byintense competition, supply shortages or oversupply, rapid technologicalchange, declining average selling prices and rapid product obsolescence, all ofwhich make it more challenging to effectively manage our inventory. Inaddition, we are required to order or build inventory well in advance of thetime of our anticipated sales.

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

In this regard, our inventory increased substantiallyin 2004 and 2005 because sales were substantially less than our anticipateddemand and we were required to make advance inventory purchase commitments foranticipated sales. Accordingly, we recorded an inventory valuation write-down ofapproximately $2,050,000 for the year ended December 31, 2005.  During the three and nine months endedSeptember 30, 2006, we recorded an inventory valuation write-down ofapproximately $169,000.

In the event that our sales do not increase, the salesprice of our products decrease or we are otherwise unable to control inventorylevels consistent with actual demand, we may be required to write downadditional inventory. Any such write-down would adversely affect our operatingresults in future periods.

**If wedefault under either the Convertible Note or the Senior Secured Note deliveredto Goldman, Sachs & Co. in the Financing, the principal and accruedinterest under each note would become due and payable which would substantiallyharm our cash position and business prospects.**

On March 23, 2006, we closed the Financing for$25,000,000 which included delivery of a 10% Convertible Note in the principalamount of $10,000,000 and a 9.5% Senior Secured Note in the principal amount of$7,500,000. Each of these notes contains events of default that, if triggered,would require us to pay the principal and accrued interest under both notesimmediately (after the expiration of applicable cure periods). If an event ofdefault occurs under the notes and the holder declares all outstandingprincipal and interest immediately due and payable, our cash position andbusiness prospects would be substantially harmed.

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

The market for broadband products in the cabletelevision industry is extremely competitive, subject to drastic technologicalchanges and highly fragmented. Our products in the Cable Solutions segment arerelatively new and unknown; accordingly, we have not generated significantrevenue in this segment. We have only recently shipped our first commercial ordersfor our Spectrum Overlay solution to two systems of a top MSO. Other than theseorders, to date, we have only begun to 

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install our Spectrum Overlay products with customersin field trials. There can be no assurance that our initial installations ofour cable products will be successful. As our cable products continue to be ina development stage, we may face challenges such as market resistance to a newproduct, perceptions regarding customer support and quality control.

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

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

A relatively small number of customers account for alarge percentage of our revenues, as set forth in the table below:
| ** **                 | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                   | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Customer A,  related party |       | 85                                                         | %          | —                                              |       | 86 | % | — |   |
| Customer B                 |       | 14                                                         | %          | 9                                                   | %          | 11 | % | 1 | % |
| Customer C                 |       | 1                                                          | %          | 28                                                  | %          | 1 | % | 3 | % |
| Customer D                 |       | —                                                     |       | 20                                                  | %          | 1 | % | 47 | % |
| Customer E                 |       | —                                                     |       | 12                                                  | %          | 1 | % | 4 | % |
| Customer F                 |       | —                                                     |       | 16                                                  | %          | — |   | 2 | % |
| Customer G                 |       | —                                                     |       | 10                                                  | %          | — |   | 3 | % |

 

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

In this regard, sales to Customer A in the nine monthsended September 30, 2006 accounted for the vast majority of our sales duringthat period. This customer was formed and initially capitalized in the firstquarter of 2006 and has a very limited history of operations, profitable orotherwise. We expect sales to this customer to be material to our operationsfor the foreseeable future. If this customer is not successful in operating itsbusiness, or if sales to this customer are lower than our expectations, ourbusiness could be harmed.

**Oursuccess will depend on MSOs’ willingness and ability to substantially increasethe available bandwidth on their networks using our alternative technologysolution.**

For our cable products to be sold in significantquantities, MSOs must be willing and able to substantially increase theavailable bandwidth on their networks. MSOs may not be willing or able todevelop additional services and revenue streams to justify the deployment ofour technology. Meanwhile, major MSOs have indicated that the imminentcompletion of significant network upgrades, which involve significant labor andconstruction costs, will lead to lower capital expenditures in the future. Ifour product portfolio and product development plans do not position us well tocapture an increased portion of the expected reduced capital spending of thesecable operators, our operating results would be adversely affected.

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

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

While we are continuing to operate our traditionalWireless Solutions segment and have increased our sales and marketing effortsto address the utilities and oil and gas market and other new markets, we mayalso consider a variety of alternatives to this business, including the sale,divestiture, license or restructuring of a substantial portion or all of ourcurrent wireless network technology or assets. In the event of any suchtransaction, the value we may realize in the current market could be minimal.

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**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.**

Telecommunications service providers continuallyevaluate alternative technologies, including digital subscriber line, fiber andcable. Should service providers or systems integrators, to which we may sellproducts in the future, cease to emphasize systems that include our products,choose to emphasize alternative technologies or promote systems of ourcompetitors, our business would be seriously harmed.

Market conditions remain difficult and capitalspending plans are often constrained. It is likely that further industryrestructuring and consolidation will take place. Companies that have historicallynot had a large presence in the broadband access equipment market have begun toexpand their market share through mergers and acquisitions. The continuedconsolidation of our competitors could have a significant negative impact onus. Further, our competitors may bundle their products or incorporatefunctionality into existing products in a manner that discourages users frompurchasing our products or which may require us to lower our selling pricesresulting in lower gross margins.

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

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

Our future success depends upon the growth of thecommunications industry, the cable television industry and, in particular, theInternet. These markets continue to evolve rapidly because of advances intechnology and changes in customer demand. We cannot predict growth rates orfuture trends in technology development. It is possible that cable televisionoperators, telecommunications companies or other suppliers of broadbandservices will decide to adopt alternative architectures or technologies thatare incompatible with our current or future products. If we are unable todesign, develop, manufacture and sell products that incorporate or arecompatible with these new architectures or technologies, our business willsuffer. Also, decisions by customers to adopt new technologies or products areoften delayed by extensive evaluation and qualifications processes and canresult in delays of current products.

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

**Oursuccess depends significantly on Davidi Gilo, our Chairman of the Board andChief Executive Officer, the loss of whom could seriously harm our business.**

Our future success depends in large part on thecontinued services of our senior management and key personnel. In particular,we are significantly dependent on the services of Davidi Gilo, our Chairman ofthe Board and Chief Executive Officer. We do not carry key person lifeinsurance on our senior management or key personnel. Any loss of the servicesof Mr. Gilo or other members of senior management or other key personnel couldseriously harm our business.

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

We may continue to explore investments in oracquisitions of other companies, products or technologies, including companiesor technologies that are not complementary or related to our current wirelessbroadband access business. We ultimately may be unsuccessful in operatingand/or integrating an acquired company’s personnel, operations, products andtechnologies into our business. These difficulties may disrupt our ongoingbusiness, divert the time and attention of our management and employees andincrease our expenses.

Moreover, the anticipated benefits of our acquisitionof Xtend or any other acquisition may not be realized or may not be realized inthe time period we expect. Future acquisitions could result in dilutiveissuances of equity securities, the incurrence of debt, contingent liabilitiesor amortization expenses related to goodwill and other identifiable intangibleassets and the incurrence of large and immediate write-offs, any of which couldseriously harm our business. In addition, we expect that we will expendsignificant resources in searching for and investigating new businessopportunities, and may be unsuccessful in acquiring new businesses.

**We willneed to develop distribution channels and management resources to market andsell our cable products.**

Our Spectrum Overlay solutions are at a relativelyearly stage in the commercialization of our cable products. We currently havelimited relationships with potential customers and distributors as well aslimited professional sales staff. We will be successful only if we are able todevelop distribution channels to market and sell our cable products.

In order todevelop such channels and market and sell our cable products, we will need tocontinue to build a well-connected team of executives and marketingprofessionals. Many of these executive and professionals will be based in theUnited States. It may be difficult for us to hire and retain qualifiedpersonnel. Integrating new personnel, particularly U.S. based personnel, may be

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challenging from a culture and logistics perspectivebecause most of our employees in our Cable Solutions segment are currentlybased in Israel. Meanwhile, our management has limited experience in the cableindustry.

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

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

We have not yet produced our Spectrum Overlaysolutions products in high volumes and there may be challenges and unexpecteddelays, such as quality control issues, in our attempts to increase volume andlower production costs. Our long-term success depends on our ability to producehigh quality products at a low cost and, in particular, to reduce theproduction cost of our cable products designed for residential use.

Because we have not yet deployed our Spectrum Overlaysolutions products in high volume, there is significant technology riskassociated with any such future deployment. We cannot be sure that any suchhigh volume deployment would be successful.

**We willdepend on cable and telecommunications industry capital spending for much ofour revenue and any decrease or delay in such spending would adversely affect ourprospects.**

Demand for our products will depend on the size andtiming of capital expenditures by telecommunications service providers andMSOs. These capital spending patterns are 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 and telecommunications service providers donot make significant capital expenditures, our prospects would be adverselyaffected.

**We willdepend on future demand for additional bandwidth by the cable industry and itsend customers.**

Because our cable products expand available bandwidthover existing infrastructure, demand for these products depends on demand foradditional bandwidth by the cable industry and its end customers. The scope andtiming of end customer demand for such additional bandwidth is uncertain andhard to predict. The factors influencing this demand include competitiveofferings, applications availability, pricing models, costs, regulatoryrequirements and the success of initial roll-outs. If the future demand forbandwidth is insubstantial, is addressed by alternative technologies or doesnot develop in the near future, our prospects would be adversely affected.

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

We are not active in the standards process of theCable Television Laboratories, Inc., a cable industry consortium thatestablishes cable technology standards and administers compliance testing. Inthe future, we may determine to join or not join other standards or similarorganizations. 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.

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**Productstandardization, as may result from wireless industry initiatives or frominitiatives of the major cable operators, may adversely affect our prospects.**

Product standardization initiatives encouraged bytelecommunications companies and cable operators may adversely affect revenues,gross margins and profits. In the past, standardization efforts by major cableoperators have negatively impacted equipment vendors by leading to equipmentobsolescence, commoditization and reduced margins. If our products are notcompliant with future standards, our prospects could be adversely affected.

**Since wereduced our workforce in August 2005, our research and development effortscould be harmed.**

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

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

There has been significant price erosion in thebroadband equipment field. We expect that continued price competition amongbroadband access equipment and systems suppliers will reduce our gross marginsin the future. We anticipate that the average selling prices of broadbandaccess systems will continue to decline as product technologies mature. We maybe unable to reduce our manufacturing costs in response to declining averageper unit selling prices. Our competitors may be able to achieve greatereconomies of scale and may be less vulnerable to the effects of pricecompetition than we are. These declines in average selling prices willgenerally lead to declines in gross margins and total profitability for thesesystems. If we are unable to reduce our costs to offset declines in averageselling prices, we may not be able to achieve or maintain profitability.

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

Future demand for our broadband wireless and cableproducts will depend significantly on the growing market acceptance of severalemerging broadband services, including digital video, video-on-demand, highdefinition television, very high-speed data services and VoIP telephony. Theeffective delivery of these services will depend in part on a variety of newnetwork architectures, such as fiber-to-the premises networks, videocompression standards such as MPEG-4 and Microsoft’s Windows Media 9, thegreater use of protocols such as IP and the introduction of new consumerdevices, such as advanced set-top boxes and digital video recorders. Ifadoption of these emerging services and/or technologies is not as widespread oras rapid as we expect, our net sales growth would be materially and adverselyaffected.

Furthermore, other technological, industry andregulatory trends will affect the growth of our business. These trends includethe 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 tripleplay as aggressively as we expect, our net sales growth would be materially andadversely affected. Similarly, if our expectations regarding these and othertrends are not met, our net sales could be materially and adversely affected.

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

Our quarterly operating results have variedsignificantly in the past and are likely to vary significantly 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 

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                                                ofbroadband access equipment and systems 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 the recognition of revenue, even from onecustomer, could have a significant negative impact on our results of operationsfor a given period. Also, because only a small portion of our expenses varywith our revenues, if revenue levels for a quarter fall below our expectations,we would not be able to timely adjust expenses accordingly, which would harmour operating results in that period. We believe that period-to-periodcomparisons of our results of operations are not meaningful and should not berelied upon as indicators of future performance. If our operating results fallbelow the expectations of investors in future periods, our share price wouldlikely decline.

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

Our research and development facilities are located inIsrael. Our reliance on international sales, operations and suppliers exposesus to foreign political and economic risks, which may impair our ability togenerate revenues. These risks include:

·              economic,inflation and political instability;

·              terroristacts, international conflicts and acts of war;

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

·              changesin regulatory requirements and licensing frequencies to service providers;

·              importor export licensing requirements and tariffs;

·              laborshortages or stoppages;

·              traderestrictions and tax policies; and

·              limitedprotection of intellectual property rights.

Any ofthe foregoing difficulties of conducting business internationally couldseriously harm our business.

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

Our research and development and final testing andassembly facilities, a majority of our employees and some of our contractmanufacturers are located in Israel. Political, economic and militaryconditions in Israel directly affect our operations. Since the establishment ofthe State of Israel in 1948, a number of armed conflicts have taken placebetween Israel and its Arab neighbors and a state of hostility, varying indegree and intensity, has led to security and economic problems for Israel. Hostilitieswithin Israel have dramatically escalated in recent years, which could disruptour operations. In addition, the recent wars in Iraq and Afghanistan and thecurrent military and political presence of the United States or its allies inIraq and Afghanistan could cause increasing instability in the 

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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.Moreover, several countries still restrict business with Israel and withIsraeli companies. We could be adversely affected by restrictive laws orpolicies directed towards Israel or Israeli businesses.

Our Chief Financial Officer, one of our directors anda majority of our employees are based in Israel, and many of them are currentlyobligated to perform annual reserve duty and are subject to being called toactive duty at any time under emergency circumstances. We cannot assess thefull impact of these requirements on our workforce or business if conditionsshould change, and we cannot predict the effect on us of any expansion orreduction of these obligations.

**Becausesubstantially all of our revenues are generated in U.S. dollars while a portionof our expenses are incurred in New Israeli Shekels, our results of operationscould be seriously harmed if the rate of inflation in Israel exceeds the rateof devaluation of the New Israeli Shekel against the U.S. dollar.**

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

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

Wegenerally sell our broadband access equipment and systems based on individualpurchase orders. Our customers generally are not obligated by long-termagreements to purchase our systems, and the agreements we have entered into,other than our agreement with ANI, do not obligate our customers to purchase aminimum number of systems. Our customers can generally cancel or rescheduleorders on short notice and discontinue using our systems at any time. Further,having a successful field system trial does not necessarily mean that thecustomer will order large volumes of our systems. The reduction, delay orcancellation of orders from one or more of our customers could seriously harmour operating results.

**Thepotential effects of regulatory actions could impact spectrum allocation andfrequencies worldwide and cause delays or otherwise negatively impact thegrowth and development of the broadband market, which would adversely affectour business.**

Countries worldwide are considering or are in theprocess of allocating frequencies for wireless applications, but not allmarkets have done so. If the United States and/or other countries do notprovide sufficient spectrum for wireless applications or reallocate spectrum inthe wireless frequency bands for other purposes, our customers may delay orcancel deployments in broadband wireless, which could seriously harm ourbusiness. Further, if our customers are unable to obtain licenses or sufficientspectrum in the wireless frequency bands our business could be seriouslyharmed.

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

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

The market for broadband access equipment and systemsis intensely competitive, rapidly evolving and subject to rapid technologicalchange. The main competitive factors in our markets include:

·              product performance,features and reliability;

·              price;

·              stability;

·              scopeof product line;

·              salesand distribution capabilities;

·              technicalservice and support;

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

·              industrystandards.

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Certain of our competitors and potential competitorshave substantially greater financial, technical, distribution, marketing andother resources than we have and, therefore, may be able to respond morequickly to new or changing opportunities, technologies and other developments.In addition, many of our competitors have longer operating histories, greatername recognition, broader product lines and established relationships withsystem integrators and service providers. Our primary competitors are AlvarionInc.; Aperto Networks, Inc.; NextNet Wireless, Inc.; IP Wireless, Inc.; NaviniNetworks, Inc.; Wi-LAN Inc.; SR Telecom Inc.; Harris Corporation; CambridgeWireless Limited; Flarion Technologies Inc. (acquired by Qualcomm Incorporatedin January 2006); VCom Inc.; Airspan Networks, Inc.; ZTE Corporation;Scientific Atlanta (purchased by Cisco Systems, Inc. in 2006); Motorola, Inc.;C Cor Incorporated and Narad Networks, Inc. Most of these competitors haveexisting relationships with one or more of our prospective customers. For our broadbandwireless offerings, we face competition from technologies such as digitalsubscriber line, fiber and cable. In the cable industry, our cable offeringsface competition from technologies such as digital set-top boxes, high-endcompression technologies and DVRs. Furthermore, the move toward open standardsmay increase the number of operators who will offer new services, which in turnmay increase the number of competitors and drive down the capital expendituresper subscriber deployed. We may not be able to compete successfully against ourcurrent and future competitors, and competitive pressures could seriously harmour business.

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

Our systems will occasionally contain certain defectsor errors. This may result either from defects in components supplied by thirdparties or from errors or defects in our firmware or hardware that we have failedto detect. We have in the past experienced, and may experience from time totime in the future, defects in new or enhanced products and systems aftercommencement of commercial shipments, or defects in deployed systems. This maybe observed in connection with stability or other performance problems. Ourcustomers integrate our systems into their networks with components from othervendors. Accordingly, when problems occur in a network system, it may bedifficult to identify the component that caused the problem. Regardless of thesource of these defects or errors, we will need to divert the attention of ourengineering personnel from our product development efforts to address thedefect or error. We have incurred in the past and may again incur significantwarranty and repair costs related to defects or errors, and we also may besubject to liability claims for damages related to these defects or errors. Theoccurrence of defects or errors, whether caused by our systems or thecomponents of another vendor, may result in significant customer relationshipproblems and injury to our reputation and may impair the market acceptance ofour systems.

**We dependon contract manufacturers and third party equipment and technology suppliers,and these manufacturers and suppliers may be unable to fill our orders ordevelop compatible, required technology on a timely basis, which would resultin delays that 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 party withlittle or no notice. If our manufacturers are unable or unwilling to continuemanufacturing our systems in required volumes, we would have to identifyqualified alternative manufacturers, which would result in delays that couldcause our results of operations to suffer. Our limited experience with thesemanufacturers does not provide us with a reliable basis on which to projecttheir ability to meet delivery schedules, yield targets or costs. If we arerequired 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 to system integrators, we alsosell in some instances directly to service providers. Such direct sales requireus to resell equipment to service providers manufactured by third partysuppliers and to integrate this equipment with the equipment we manufacture. Weare particularly dependent on third party radio suppliers in selling our 3.5Ghz and other products. We currently have no formal relationship with any thirdparty supplier. If we are unable to establish relationships with suppliers, orif these suppliers are unable to provide equipment that meets thespecifications of our customers on the delivery schedules required by ourcustomers, and at acceptable prices, our business would be substantiallyharmed.

Our Spectrum Overlay solutions are implemented overthe HFC plant and, as such, they interface and integrate with existing productsfrom multiple other vendors. Future offerings by these vendors may not besufficiently compatible with our Spectrum Overlay solutions. In addition, wedepend on the continuous delivery of components by various manufacturers ofelectronic connectors, filters, boards and transistors.

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**We obtainsome of the components included in our systems from a single source or alimited group of suppliers,****and the lossof any of these suppliers could cause production delays and a substantial lossof revenue.**

We currently obtain key components from a limitednumber of suppliers. Some of these components, such as semiconductor componentsfor our wireless hubs, are obtained from a single source supplier. We generallydo not have long-term supply contracts with our suppliers. These factorspresent 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;

·                                    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.

Theoccurrence of any of these or similar events would harm our business.

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

We have increased certain expenses to address newbusiness opportunities in both the Wireless Solutions and Cable Solutionssegments, and we will need to continue to monitor closely our costs andexpenses. If the market and our business do not expand, we may need to furtherreduce our operations. In addition, our acquisition of Xtend has caused ourcosts to increase as we seek to develop business.

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

Delays and shortages in the supply of components aretypical in our industry. We have experienced minor delays and shortages on morethan one occasion in the past. In addition, any failure of necessary worldwidemanufacturing capacity to rise along with a rise in demand could result in oursubcontract manufacturers allocating available capacity to larger customers orto customers that have long-term supply contracts in place. Our inability toobtain adequate manufacturing capacity at acceptable prices, or any delay orinterruption in supply, could reduce our revenues or increase our cost ofrevenue and could seriously harm our business.

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

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

·              obtain licenses to theinfringing 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 or litigation against us couldsignificantly harm our business, operating results and financial condition.

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

Our success depends in part on our ability to protectour proprietary technologies. We rely on a combination of patent, copyright andtrademark laws, trade secrets and confidentiality and other contractualprovisions to establish and protect our proprietary rights. Our pending orfuture patent applications may not be approved and the claims covered by suchapplications may be reduced. If allowed, our patents may not be of sufficientscope or strength, and others may independently develop similar technologies orproducts. Litigation, which could result in substantial costs and diversion ofour efforts, may also be necessary to enforce any patents issued or licensed tous or to determine the scope and validity of third party proprietary rights.Any such litigation, regardless of the outcome, could be expensive and timeconsuming, and adverse determinations in any such litigation could seriouslyharm our 

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business.

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

We regularly evaluate and seek to explore and developderivative products relating to the systems of our Wireless Solutions and CableSolutions segments. We may not be able to secure all desired intellectualproperty protection relating to such derivative products. Furthermore, becauseof the rapid pace of change in the broadband industry, much of our business andmany of our products rely on technologies that evolve constantly and thiscontinuing uncertainty makes it difficult to forecast future demand for ourproducts.

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

A customer’s decision to purchase our productstypically involves a significant technical evaluation, formal internalprocedures associated with capital expenditure approvals and testing andacceptance of new systems that affect key operations. For these and otherreasons, the sales cycle associated with our systems can be lengthy and subjectto a number of significant risks, over which we have little or no control.Because of the growing sales cycle and the likelihood that we may rely on asmall number of customers for our revenues, our operating results could beseriously harmed if such revenues do not materialize when anticipated, or atall.

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

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

We are subject to export control laws and regulationswith respect to certain of our products and technology. We are subject to therisk that more stringent export control requirements could be imposed in thefuture on product classes that include products exported by us, which wouldresult in additional compliance burdens and could impair the enforceability ofour contract rights. We may not be able to renew our export licenses asnecessary from time to time. In addition, we may be required to apply foradditional licenses to cover modifications and enhancements to our products.Any revocation or expiration of any requisite license, the failure to obtain alicense for product modifications and enhancements, or more stringent exportcontrol requirements could seriously harm our business.

**We are incurring additional costsand devoting more management resources to comply with increasing regulation ofcorporate governance and disclosure.**

The Sarbanes Oxley Act of 2002 that became law in July2002 and the resulting rules of the Nasdaq Global Market have required and willcontinue to require changes in our corporate governance, public disclosure andcompliance practices. The number of rules and regulations applicable to us hasincreased and will continue to increase our legal and financial compliancecosts. In addition, we have incurred and will continue to incur significantcosts as we prepare to comply with Section 404 of the Sarbanes Oxley Act of2002 regarding internal control over financial reporting. These laws andregulations and perceived increased risk of liability could make it more difficultfor us to attract and retain qualified members of our Board of Directors,particularly to serve on our audit committee, and qualified executive officers.We cannot estimate the timing or magnitude of additional costs we may incur asa result.

In addition to the increased costs discussed above, weare spending an increased amount of management time and internal resources tounderstand and comply with these changing laws, regulations and standardsrelating to corporate governance and public disclosure. Allocating thenecessary resources to comply with evolving corporate governance and publicdisclosure standards has increased general and administrative expenses andcaused a diversion of management time and attention to compliance activities.

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

Since our inception, we have used stock options as afundamental component of our employee compensation packages. We believe thatour stock option plans are an important tool to link the long-term interests ofstockholders and employees, especially executive management, and serve tomotivate management to make decisions that will, in the long run, give the bestreturns to stockholders. FASB has adopted changes to U.S. GAAP that require usto record a charge to earnings for employee stock option 

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grants, as well as other equity based awards. Thechange has negatively impacted our earnings and, if such impact is material inthe future, could affect our ability to raise capital on acceptable terms. Inaddition, regulations implemented by the Nasdaq Global Market requiringstockholder approval for all stock option plans could make it more difficult forus to grant 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.

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

Certain of our capital investments have been granted “approvedenterprise” status under Israeli law providing us with certain Israeli taxbenefits. The benefits available to an approved enterprise are conditioned uponthe fulfillment of conditions stipulated in applicable law and in the specificcertificate of approval. If we fail to comply with these conditions, in wholeor in part, we may be required to pay additional taxes for the period in whichwe enjoyed the tax benefits and would likely be denied these benefits in thefuture. From time to time, the government of Israel has considered reducing oreliminating the benefits available under the approved enterprise program. Thesetax benefits may not be continued in the future at their current levels or atall. The termination or reduction of these benefits would increase our taxesand could seriously harm our business. As of the date hereof, our Israelisubsidiaries, Vyyo Ltd. and Xtend, have accumulated loss carry forwards forIsraeli tax purposes and therefore have not enjoyed any tax benefits undercurrent approved enterprise programs.

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

As of April 1, 2005, the government of Israeleliminated the ability of companies to submit new applications for approvedenterprise status. This change in the government policy may hinder us in thefuture with respect to any benefits we may have received for new undertakingswhich would have been entitled to “approved enterprise” status.

**Amajority of our directors and certain officers have relationships****with Davidi Gilo and his affiliated companies thatcould be deemed to limit their independence.**

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.

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

As of September 30, 2006, our management collectivelyowned approximately 31.3% of our outstanding common stock (based on the numberof shares owned by these individuals and the number of shares issuable uponexercise of options within 60 days of September 30, 2006).

As a result, these stockholders, acting together, willbe able to control the outcome of all matters 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 of ownership may have the effect ofimpeding a merger, consolidation, takeover or other business consolidationinvolving us, or discouraging a potential acquirer from making a tender offerfor our shares. This concentration of 

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ownership could also negatively affect our stock’smarket price or decrease any premium over market price that an acquirer mightotherwise pay.

**We relyon a continuous power supply to conduct our operations, and any electrical ornatural resource crisis could disrupt our operations and increase our expenses.**

We rely on a continuous power supply for manufacturingand to conduct our business operations. Interruptions in electrical powersupplies occur around the world from time to time. Meanwhile, prices of theresources, such as electrical power and crude oil, upon which we ultimatelyrely, directly or indirectly, in running our business have been volatile. Powershortages, as have occurred in California and China, could disrupt ourmanufacturing and business operations and those of many of our suppliers, andcould cause us to fail to meet production schedules and commitments tocustomers and other third parties. Any disruption to our operations or those ofour suppliers could result in damage to our current and prospective businessrelationships and could result in lost revenue and additional expenses, therebyharming our business and operating results.

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

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

·              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

·              sales of our common stock.

Manyof these factors are beyond our control and may negatively impact the marketprice of our common stock, regardless of our performance. In addition, thestock market in general, and the market for technology and telecommunicationsrelated companies in particular, have been highly volatile. Our common stockmay not trade at the same levels compared to shares of other technologycompanies and shares of technology companies, in general, may not sustain theircurrent market prices. In the past, securities class action litigation hasoften been brought against a company following periods of volatility in themarket price of its securities. We could become the target of similarlitigation in the future. Securities litigation could result in substantialcosts and divert management’s attention and resources, which could seriouslyharm our business and operating results.

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

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

·                                          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.

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

**It may bedifficult to enforce a judgment in the United States against us and ournonresident Chief Financial Officer and certain directors.**

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

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**Item6.**                          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.                                                                                                                                                            |
|            |       |                                                                                                                                                                                                        |
| 31.1            |       | Certificate of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          |
|            |       |                                                                                                                                                                                                        |
| 31.2            |       | Certificate of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          |
|            |       |                                                                                                                                                                                                        |
| 32.1            |       | Certificate of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                              |

 

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**SIGNATURES**

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

 
|        | Date: November 14, 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) |   |

 

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**EXHIBIT INDEX**
| 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.                                                                                                                                                           |       |
|            |       |                                                                                                                                                                                                        |       |
| 31.1            |       | Certificate  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                         |       |
|            |       |                                                                                                                                                                                                        |       |
| 31.2            |       | Certificate  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                         |       |
|            |       |                                                                                                                                                                                                        |       |
| 32.1            |       | Certificate of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                              |       |

 

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