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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission File Number 000-30189

VYYO INC.

(Exact name of registrant as specified in its charter)

4015 Miranda Ave., First Floor, Palo Alto, California 94304

(Address of principal executive offices, including zip code)

(650) 319-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.0001 par value

(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2004 was approximately $54,210,183. For purposes of this calculation only, (i) shares of Common Stock are deemed to have a market value of $6.47 per share, the closing price of the Common Stock as reported on the Nasdaq National Market on June 30, 2004, (ii) each of the executive officers, directors and persons beneficially owning 5% or more of the outstanding Common Stock is deemed to be an affiliate, and (iii) options to purchase shares of Common Stock are not considered.

The number of shares of Common Stock outstanding on February 7, 2005 was 15,256,503 shares.

Documents Incorporated By Reference:    Part III, Items 10, 11, 12, 13 and 14 of this Report are incorporated by reference from the definitive Proxy Statement for the registrant’s 2005 annual meeting of stockholders.

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VYYO INC.

2004 FORM 10-K ANNUAL REPORT

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PART I

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

Statements made in this report on Form 10-K relating to the future, including those related to (1) cable operators’ strategies, competitive forces and opportunities; (2) the potential for Xtend Networks’ systems to generate new customers, markets and revenues, as well as its competitive advantages over incumbent telecommunications entities for cable operators; (3) the contemplated activity of regulatory bodies; (4) our dividend policy; (5) expectations regarding our future financial performance, such as our expectations of continued net losses; of increased sales and marketing expenses; of potential tax impact of our losses; that our revenues will continue to be concentrated among a few customers; that our gross margins will continue to fluctuate and our cost of revenues will increase; of increased research and development expenses; regarding payments relating to future benefits to its employees upon retirement; and regarding accounting pronouncements; (6) alternative business opportunities; and (7) the adequacy of our facilities, are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terminology such as “may,” “will,” “should,” “intend,” “expect,” “plan,” “estimate,” “project,” “anticipate,” or “believe” and similar language identifies forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, those set forth below under the caption “Risk Factors” set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We assume no obligation to update any forward-looking statement.

Item 1. Business

Overview

We supply end-to-end broadband communication network solutions. Our infrastructure solutions significantly expand the two-way bandwidth capacity of hybrid-fiber coaxial cable television networks. Our technology enables operators to deliver circuit-switched and Internet Protocol (“IP”) based broadband services to business and residential subscribers. We sell our systems to system integrators, distributors and directly to service providers.

Starting in 2003, we believed new opportunities might develop for our traditional wireless products and began to dedicate additional resources to sales in international markets, particularly China. These opportunities, however, are developing slowly and the pricing environment is very competitive. If our sales do not substantially increase from current levels, we will continue to incur losses, and may never achieve profitability. We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future.

In addition to further developing our traditional wireless business, we have invested significant time and resources searching for and investigating new business opportunities.

On June 30, 2004, we completed the acquisition of all of the outstanding shares of Xtend Networks Ltd. and its wholly-owned, U.S.-based subsidiary, Xtend Networks, Inc. (collectively, “Xtend”). Xtend provides infrastructure solutions that expand the bandwidth capacity of hybrid-fiber coaxial cable television lines. Xtend is based in Tel Aviv, Israel and has an office in Atlanta, Georgia. Xtend employed 49 individuals worldwide as of December 31, 2004. Xtend has never been profitable and, as it is in a development stage, to date it has not generated any revenues. The results of Xtend’s operations were consolidated with Vyyo’s operations commencing July 1, 2004.

The acquisition of Xtend, which is currently operating as a wholly-owned subsidiary of Xtend Cable Solutions Inc., a wholly-owned subsidiary of Vyyo Inc., is intended to diversify our business and to seek to open new markets for our current products. In May of 2004, we announced that we would leverage Vyyo’s Data Over Cable System Interface Specification (DOCSIS^®)-based wireless hub to enable cable companies to offer voice grade T1 circuit-switched products.

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Our business model depends upon North American cable network operators responding to increased competition from traditional telecommunication service providers and satellite broadcasters with differentiating, bandwidth-intensive applications. These advanced services include high definition TV, video-on-demand, network-based digital video recording, high definition video-on-demand, peer-to-peer gaming and peer-to-peer video conferencing. Our technology is designed to provide an economically attractive platform to expand the operators’ network bandwidth and provide these advanced services, as well as to attract new small and medium-sized business (“SMB”) customers. This technology is at different stages in several field trials with the largest cable network operators in North America.

Vyyo was incorporated in Delaware in 1996.

Wireless Broadband Access Business

General

We supply wireless broadband end-to-end solutions used by telecommunications providers to deliver both wireless telephony and high-speed data connections to business and residential subscribers. The technology uses point-to-multipoint architecture to deliver circuit switched (telephony), as well as voice and data over Internet Protocol. We sell our systems directly to service providers and system integrators, who provide network planning and integration services and integrate our systems with other components in the network and provide their customers with end-to-end network solutions.

Our systems are deployed in point-to-multipoint applications at the radio frequencies designated for two-way broadband communication. The majority of our systems are deployed in the 3.5 Ghz band internationally and the 2.5 Ghz and 700 MHz bands in the U.S. Point-to-multipoint technology refers to the ability of a central, wireless hub to transmit and receive network traffic to and from multiple subscriber modems. Our systems support both voice and data communications. We support 802.3 bridging across our network, which allows us to support Internet Protocol, or IP. IP is, in turn, the networking standard used to deliver voice, video and data over the Internet. Networking standards are the special set of rules for communicating that the end points in a telecommunication connection use to send signals back and forth. We also support voice and data via a circuit-switched connection providing a dedicated connection to a subscriber with dependable throughput and latency. Service providers use our system to bridge the segment of the network that connects the service providers’ systems directly to the subscribers, commonly referred to as the last mile. In addition, our systems are used to connect cellular based stations to a base station controller, commonly known as a backhaul connection.

Our system consists of a wireless hub, which serves as a point of convergence for data traffic in a network, network management system and wireless subscriber modems. Each wireless hub is located at a base station, which houses the network components of our system. Each hub transmits and receives network traffic to and from our wireless modems, which are installed at multiple subscriber locations. Our network management system provides remote monitoring and configuration services with respect to the wireless hubs and modems to allow the service provider to operate the system from a central location.

The Vyyo Solution

Our system is designed to allow service providers to rapidly deploy cost-effective, high speed data and voice connections directly for business, residential and cellular backhaul applications. Our systems are deployed in point-to-multipoint applications at the frequencies designated for these applications and consist of a broadband hub, which serves as a point of convergence for data traffic in a network, network management system software and subscriber modems. Each broadband hub is located at a base station, which houses the components in the network. Our modems are installed at multiple subscriber locations.

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Using our wireless point-to-multipoint system, service providers can roll out network service quickly and with a minimal initial investment and can then expand their networks by adding more wireless hubs and subscriber wireless modems as the number of subscribers grows.

Our system is used primarily at the 2.5 GHz MMDS and the 700 MHz bands in the United States and at the 3.5 Ghz band internationally.

Products

Wireless Hub. Our wireless hub manages data communications between wireless modems located at subscribers’ locations and network devices such as routers located at a central office or base station. The primary role of the wireless hub is to manage the upstream traffic from the subscriber toward the public telephone and data networks, and the downstream traffic from the networks toward the subscriber. Our wireless hub is designed to support tens, hundreds or even thousands of users depending upon the configuration and application.

Our wireless hub is designed to support a variety of channel capacities by using combinations of six communications modules as either upstream or downstream modules, with each upstream module supporting either one or six upstream receivers, and each downstream module supporting either one or four downstream transmitters. For example, our system can provide 24 upstream channels and four downstream channels. A channel is a subdivision of a frequency band used to transmit radio frequency signals. This flexibility allows the operator to configure a system for each specific situation.

Multiple wireless hubs may be controlled through one central network management system.

Our network management system manages overall system operations. The system features graphical views of wireless hubs and modems. The network management system allows network operators to configure, maintain and troubleshoot hubs and modems from a central workstation.

Wireless Modems. We sell several kinds of wireless modems. Our data modem is designed for residential, home office or small office deployment. It can support up to 75 individual users at the LAN that is served by the modem, without a router. Our V284 modem, with its built-in 700 MHz radio, provides broadband wireless data and VoIP services to residential and business customers over a radius exceeding 25 miles when used in conjunction with our V3000 T1/E1 base stations or V2800 IP broadband hubs.

Technology

Our experience in designing shared bandwidth communications systems using time division multiple access, or TDMA, technology is the foundation of our expertise in the point-to-multipoint broadband wireless access market. TDMA is a technology that allows multiple users to share available bandwidth. We have extensive expertise in system design, as well as modem and broadband radio frequency technology. We have developed media access control, or MAC, layer algorithms, and scheduling algorithms, that maximize the number of subscribers that can share a single upstream channel.

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Support of Internet Protocol. Our system architecture supports Internet Protocol communications traffic, and our primary systems components, the media access controller and the scheduler, are optimized for Internet Protocol communications traffic. We have designed our systems to carry variable-length Internet Protocol packets over one upstream TDMA burst as well as to support large packets that must be spread over multiple TDMA bursts.

MAC and PHY Layer Capabilities. Our media access control layer capabilities, combined with our physical layer capabilities, provide robust performance under adverse conditions and effectively utilize the limited frequency and bandwidth allocations of the 700 MHz band and 3.5 Ghz band. Our single carrier PHY layer technology offers multiple symbol rates and modulation schemes on both upstream and downstream channels which are used to optimize system configuration in any particular deployment scenario.

Scheduling Algorithms. We develop scheduling software code for DOCSIS-based TDMA point-to-multipoint systems. Our scheduling algorithms are optimized to support multiple services including Best Effort data services, Committed Information Rate data services, VoIP services and T1/E1 services, in an efficient manner for optimal utilization of the very limited wireless spectrum.

Circuit Switched Capability. Our broadband wireless access solution includes a circuit-switched capability which allows our base station and customer premise equipment (CPE) to be a multi-service platform, which delivers high speed Internet Protocol data as well as plain old telephone service (POTS) and T1/E1 services across a single, cohesive vendor platform and radio frequency (RF) infrastructure.

Customers

We sell our systems directly to service providers or to system integrators that deploy our systems as part of their end-to-end network solutions to service providers. We sell our systems based on individual purchase orders. Our customers are not obligated by long-term contracts to purchase our systems. Our customers can generally cancel or reschedule undelivered orders upon short notice and can discontinue using our systems at any time.

A relatively small number of customers account for a large percentage of our revenues. We expect that we will continue to depend on a limited number of customers for a substantial portion of our revenues in future periods.

Sales and Marketing

The global telecommunications industry is dominated by a limited number of network system integrators. We focus our marketing efforts on network system integrators that have the means to provide vendor financing to their end users customers in situations where our equipment is purchased as part of the total network. For some service providers, this financing is a necessary part of the total network solution. We support our system integrator customers with site demonstrations, and in some cases field trials, for their service provider customers. The objective of a site demonstration is to promote the adoption of our systems for deployment within the service provider’s network.

Starting in 2003, we believed new opportunities might develop for our products and began to dedicate additional resources to sales in international markets, particularly China. Our products have been deployed in over 18 provinces in China, including the Tibet Autonomous Region. However, these opportunities are developing slowly and the pricing environment is very competitive.

Manufacturing

We outsource manufacturing to contract manufacturers that have the expertise and ability to reduce costs associated with volume manufacturing and to respond quickly to customer orders while maintaining high quality standards. We outsource printed circuit board assembly, modems, up/down converters and manufacturing of our

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wireless hubs to contract manufacturers. Any inability of these manufacturers to provide the necessary capacity or output could result in significant production delays that could harm our business. The components for our wireless hubs and any third party radio equipment we require are purchased on a purchase order basis. We have no guaranteed supply or long-term contractual agreements with any of our suppliers. In addition, some of the components included in our systems are obtained from a single source or limited group of suppliers. The partial or complete loss of such suppliers could increase our costs, delay shipments or require redesigns of our products.

We assemble our wireless hubs and perform final tests on our systems at our facility located in Jerusalem, Israel. Our facility is ISO 9002-certified. ISO 9002 is a set of international quality assurance standards for companies involved in the design, development, manufacturing, installation and servicing of products or services. These standards are set by the International Organization for Standardization, or ISO, an international federation of national standards bodies. To be recommended for ISO 9002 certification, a company must be audited by an ISO-accredited auditing company and must meet or surpass ISO standards.

Research and Development

The goal of our research and development activities is to continue the development and introduction of new features that are important to our customers, such as our 700 MHz solution and the recently introduced DOCSIS^®-compatible T1 solution targeting small and medium-sized businesses. Our ongoing product development program assesses service providers’ needs and technological changes in the communications market.

We believe that our extensive experience in designing and implementing high quality network components and system software allows us to develop high quality solutions. As a result of these development efforts, we have created an integrated broadband wireless platform that delivers data, voice and T1/E1 services.

As of December 31, 2004, our research and development staff dedicated to our wireless broadband access business consisted of 33 employees, compared to 37 employees as of December 31, 2003. The majority of our research and development staff is located in Israel.

Our broadband wireless research and development expenditures were $4.9 million for 2004, $4.4 million for 2003 and $3.9 million for 2002.

Competition

The market for broadband wireless access systems is competitive, rapidly evolving and subject to rapid technological change. The principal competitive factors in this market include: product performance and features; price of competitive products; reliability and stability of operation; ability to develop and implement new services and technologies; ability to support newly allocated frequencies; development and adoption of new wireless standards (e.g., Wi-MAX); ability to provide system integration services efficiently and cost effectively; and sales capability, technical support and service.

The primary competing alternative technologies for broadband access include:

Digital Subscriber Line. Digital subscriber line, or DSL, technology today transmits data approximately 50 times faster than a conventional dial-up modem using the existing copper wire network. DSL transmission rates are limited, however, by the length and quality of the available copper wires. Various implementations of DSL are being developed and deployed. Service providers deploying DSL technology include incumbent telecommunications operators, such as SBC Communications, Inc. and Verizon Communications, as well as numerous competitive local exchange carriers.

Cable Modems. Cable modems are designed to provide broadband Internet access services by cable operators and are targeted primarily at the residential market. Cable infrastructure passes by 100 million homes

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in North America, but only a portion of those homes currently have access to two-way cable modem service. Many cable operators are currently offering broadband access services across two-way cable, and cable TV networks will be used increasingly for voice and high-speed data services.

Fiber-based Solutions. Fiber-based solutions and high-capacity leased lines offer the highest data transmission rate of any of the alternative technologies for broadband access. Fiber optic cables use pulses of light to transmit digital information. Due to their high capacity, fiber optic cables are increasingly being used in the access network in both telecommunications and cable TV applications. However, these solutions are costly to deploy for small business and residential subscribers.

DSL and cable modem technologies offer data transmission speeds comparable to our broadband wireless technology at comparable and in some cases lower modem costs. Fiber optic cable provides faster transmission rates than our broadband wireless technology, though at significantly higher costs.

Many of our competitors and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than we have and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other developments. In addition, many of our competitors have longer operating histories, greater name recognition and established relationships with system integrators and service providers. These competitors may also be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new products. Our primary competitors are currently Alvarion Inc., Aperto Networks, Inc., NextNet Wireless, Inc., IP Wireless, Inc., Navini Networks, Inc., Wi-LAN Inc., SR Telecom, Harris Corporation, Cambridge Wireless Limited, Flarion, VCOM, Airspan and ZTE Corporation. Most of these competitors have existing relationships with one or more of our prospective customers. We may not be able to compete successfully against our current and future competitors, and competitive pressures may seriously harm our business.

Government Regulation

Our business depends on the availability of certain radio frequencies for broadband two-way communications. Radio frequencies are subject to extensive regulation worldwide. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain. Historically, in many countries the unavailability of radio frequencies for two-way broadband communications has inhibited the growth of such networks. The process of establishing new regulations for broadband wireless frequencies and allocating such frequencies to operators is complex and lengthy. Our customers and potential customers may not be able to obtain sufficient frequencies for their planned uses of our systems. Failure by the regulatory authorities to allocate suitable, sufficient radio frequencies for such uses in a timely manner could deter potential customers from ordering our systems and seriously harm our business.

Our systems must conform to a variety of domestic, foreign and international regulatory requirements established to, among other things, avoid interference among users of radio frequencies and permit interconnection of equipment. Regulatory bodies worldwide have adopted and are adopting or revising standards for wireless communications products. The emergence or evolution of regulations and industry standards for broadband wireless products, through official standards committees or widespread use by operators, could require us to modify our systems, which may be expensive and time-consuming, and incur substantial compliance costs and seriously harm our business.

We are subject to export control laws and regulations with respect to certain of our products and technology. We are subject to the risk that more stringent export control requirements could be imposed in the future on product classes that include products exported by us, which would result in additional compliance burdens and could impair the enforceability of our contract rights.

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Intellectual Property

We have three issued patents and 10 patent applications pending in the United States relating to our wireless broadband access business. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights, each of which is important to our business.

Our success depends in part on our ability to protect our proprietary technologies. Our pending or future patent applications may not be approved and the claims covered by such applications may be reduced. If allowed, our patents may not be of sufficient scope or strength, and others may independently develop similar technologies or products. Further, patents held by third parties may prevent the commercialization of products incorporating our technologies or third parties may challenge or seek to narrow, invalidate or circumvent any of our pending or future patents. We also believe that foreign patents, if obtained, and the protection afforded by such foreign patents and foreign intellectual property laws, may be more limited than that provided under United States patents and intellectual property laws. Litigation, which could result in substantial costs and diversion of effort by us, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Any such litigation, regardless of outcome, could be expensive and time-consuming, and adverse determinations in any such litigation could seriously harm our business.

We also rely on unpatented trade secrets and know-how and proprietary technological innovation and expertise which are protected in part by confidentiality and invention assignment agreements with our employees, advisors and consultants and non-disclosure agreements with certain of our suppliers and distributors. These agreements may be breached, we may not have adequate remedies for any breach or our unpatented proprietary intellectual property may otherwise become known or independently discovered by competitors. Further, the laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do the laws of the United States.

From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to us. We expect that we will increasingly be subject to license offers and infringement claims as the number of products and competitors in our market grows and the functionality of products overlaps.

Others’ patents may be determined to be valid, or some or all of our products may ultimately be determined to infringe those patents. Patent holders may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products that could arise in the future, we could be required to obtain licenses to the infringing technology, pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties, either on commercially reasonable terms or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition.

Employees

During 2004, our wireless broadband access business workforce increased by approximately 10%. As of December 31, 2004, we had 96 full-time and temporary employees in our wireless broadband access business, of whom 64 were employed in Israel, 11 were employed in China and 21 were employed in the United States or other locations. Of these employees, 33 were principally dedicated to research and development, 28 were dedicated to sales, marketing and customer support and 16 were involved in manufacturing and operations. None of our U.S. employees is represented by a union.

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Our Israeli subsidiary, Vyyo Ltd., is subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of work day and work week, minimum wages, pay for overtime, insurance for work related accidents, severance pay, prior notice and other conditions of employment.

Vyyo Ltd. and our Israeli employees are subject to provisions of certain collective bargaining agreements, by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern wages, cost of living expenses and other conditions of employment. Vyyo Ltd. provides our Israeli employees with benefits and working conditions above the required minimums. Our Israeli employees are not represented by a labor union. We have not experienced any work stoppages.

Xtend Networks

General

On June 30, 2004, we completed the acquisition (the “Transaction”) of all of the outstanding shares of Xtend Networks Ltd. and its wholly-owned, U.S.-based subsidiary, Xtend Networks, Inc. (collectively, “Xtend”). Xtend Networks Ltd. was incorporated under the laws of the State of Israel in 1999. Xtend provides infrastructure solutions that expand the bandwidth of cable television lines. Xtend is currently operating as a wholly-owned subsidiary of Xtend Cable Solutions Inc., a wholly-owned subsidiary of Vyyo Inc. Xtend is based in Tel Aviv, Israel and has an office in Atlanta, Georgia. Xtend employed 49 individuals worldwide as of December 31, 2004. Xtend has never been profitable and, as it is in a development stage, to date it has not generated any revenues. The results of Xtend’s operations were consolidated with Vyyo’s operations commencing July 1, 2004.

Since Xtend’s acquisition, it has not generated any sales. Xtend incurred net losses of $7.5 million in 2004 and had an accumulated shareholder deficit as of December 31, 2004 of $2 million. We anticipate that Xtend will continue to incur net losses for the foreseeable future. Xtend will be successful only if it is able to penetrate the cable television equipment market and substantially increase its market share in this industry. If Xtend is unable to do so, its business would be harmed and its prospects significantly diminished.

Xtend’s system includes voice grade T1 and radio frequency (RF) products with node, amplifier, splitter and passive elements targeted to the coaxial portion of the existing cable infrastructure. These products are designed to enable the layer one expansion of available spectrum up to 3 GHz, which in turn allows cable operators to provide more bandwidth-intensive services to their customers.

According to an industry source, the North American cable operators invested over $95 billion in capital infrastructure over the eight years ending in 2004 (including $9.5 billion in 2004 alone) to provide digital broadband services to customers. According to the same source, there are 108,410,160 households with televisions in the United States and approximately 102,900,000 of these homes have access to cable. Of these homes, 73,575,460 are basic cable subscribers, while over 25,000,000 are digital subscribers. These networks are enabled through 9,211 headends and over 140,000 nodes.

The Xtend Solution

Xtend provides cable system operators (“MSOs”) with the opportunity to increase the availability of bandwidth on their legacy and upgraded systems through Xtend’s advanced technology. Xtend’s technology has the potential to help MSOs develop new sources of revenue, such as providing residential subscribers with the enhanced “quadruple play” of voice, data, video and wireless services, increasing capacity for high definition TV, video-on-demand, network-based digital video recording, high definition video-on-demand, peer-to-peer gaming and peer-to-peer video conferencing, while also attracting new small and medium-sized business (“SMB”) customers through T1 capabilities.

Xtend’s products are designed to be backwards compatible with the existing network equipment so as not to affect existing residential services. It provides a compatible architecture, through Block Division Multiplexing^TM

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(“BDM”) technology, that, for example, enables the continued use of existing, standardized equipment, such as DOCSIS^® cable modem termination systems (CMTS), cable modems and digital set-top units.

In a sample SMB application, the combination of Vyyo’s T1 technology and Xtend’s increased hybrid-fiber coaxial (“HFC”) capacity allows MSOs to service hundreds of T1 links over the existing HFC networks. This solution potentially creates a new market for MSOs, enabling them to provide alternatives to incumbent carriers for SMBs that need to connect local telephone switches (PBX) to the public service, or connect their local area network (LAN) to another office or to the Internet. MSOs can also offer SMBs bundled services of television, high-speed data and telephony, giving them a competitive advantage over the incumbent telecom service providers.

Products and Technology

Xtend has developed a broad range of products to address the goal of increasing the bandwidth of existing cable television lines. Xtend’s products are designed to be “backwards compatible,” attaching in parallel to current networks and allowing the utilization of pre-existing digital equipment.

Xtend’s system is made up of the following elements:

Node Products/XHUB. The XHUB is located at the fiber node, converts the HFC network standard frequency band to the coaxial plant’s extended bands. For example, Xtend’s XHUB 3004 is a block multiplexer and frequency converter which multiplexes two downstream blocks, each carrying a different content, onto a single cable coaxial plant while demultiplexing five upstream blocks.

Trunk Amplifiers/Xtendifiers. The Xtendifier is the amplification and gain control element of the “Xtended” coaxial plant. The Xtendifier is installed along the coaxial line, in parallel to existing line extenders. For example, Xtend’s XFR 3004 is a bi-directional, wide-band amplifier which operates in conjunction with the legacy amplifier.

Passive Elements. Xtend’s passive elements, with Xtend band performance, replace the existing passive elements.

XSP. The XSP replaces existing splitters with Xtend band performance.

CPE Devices/XTB. The Xtend’s XTB is a block multiplexer and frequency converter that interfaces with existing standard CPE devices, enabling subscribers to enjoy true quadruple play services.

Customers

Xtend’s target customers are MSOs. Xtend sells its products based on individual purchase orders. Xtend’s potential customers are not obligated by long-term contracts to purchase its systems. Its potential customers can generally cancel or reschedule orders upon short notice and can discontinue using Xtend’s products at any time.

To date, Xtend has not generated any revenues. When and if it does generate revenues, it is expected that a relatively small number of customers will account for a large percentage of its revenues.

Sales and Marketing

Xtend’s products are currently targeted to U.S.-based MSOs, to which it sells through its direct sales force in North America. Xtend promotes its products through direct personal contact, presentations at trade shows, expositions, seminars and lectures and public relations efforts.

Xtend has had discussions with Cox Communications Inc. that led to its being named an approved vendor for Cox systems for commercial customers. In addition, Xtend products are at different stages in field trials with other leading cable network operators in North America.

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Manufacturing

Xtend outsources its manufacturing to contract manufacturers that have the expertise and ability to respond quickly to customer orders while maintaining high quality standards. Any inability of these manufacturers to provide the necessary capacity or output could result in significant production delays that could harm Xtend’s business. The components for the equipment Xtend supplies are purchased on a purchase order basis. Xtend has no guaranteed supply or long-term contractual agreements with any of its suppliers. In addition, some of the components included in Xtend’s systems are obtained from a single source or limited group of suppliers. The partial or complete loss of such suppliers could increase our costs, delay shipments or require redesigns of our products. Xtend performs some assembly and testing in its facility located in Israel.

Research and Development

The goal of Xtend’s research and development activities is to continue the development and introduction of new features that are important to its target market. Xtend’s ongoing product development program assesses MSOs’ needs and technological changes in the cable market.

As of December 31, 2004, Xtend’s research and development staff consisted of 24 employees. All of its research and development staff is located in Israel.

Xtend’s research and development expenditures were $2.1 million for the six months ended December 31, 2004 (not including acquired research and development in process amounting to $1.4 million).

Competition

The market for cable equipment vendors is competitive, rapidly evolving and subject to rapid technological change. The principal competitive factors in this market include:

Xtend’s cable offerings face competition from technologies such as higher encoding over cable (1024QAM), high-end compression (e.g., MPEG-4), the upgrading of coaxial networks to 1GHz and fiber optic solutions. The MSOs do have partial alternatives to Xtend’s technology for increasing bandwidth on their systems, including fiber-based solutions and node-splitting. In addition, the MSOs themselves face competition from the high bandwidth solutions offered by satellite providers and incumbent telecommunications operators, including digital subscriber line, or DSL, technology and from fiber-to-the-home/curb technologies.

Many of Xtend’s competitors and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than Xtend has and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other developments. In addition, many of Xtend’s competitors have longer operating histories, greater name recognition and established relationships with the MSOs. These competitors may also be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new products. Xtend’s primary competitors are currently Scientific Atlanta, Motorola, C-Core and Narad Networks. Most of these competitors have existing relationships with one or more of Xtend’s prospective customers. Xtend may not be able to compete successfully against current and future competitors and competitive pressures may seriously harm its business.

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Government Regulation

Xtend is subject to export control laws and regulations with respect to its products and technology. Xtend is subject to the risk that more stringent export control requirements could be imposed in the future on product classes that include products exported by it, which would result in additional compliance burdens and could impair the enforceability of its contract rights.

Intellectual Property

Xtend has no issued patents and 14 patent applications pending in the United States. It relies on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights, each of which is important to Xtend’s business.

Xtend’s success depends in part on its ability to protect its proprietary technologies. Xtend’s pending or future patent applications may not be approved and the claims covered by such applications may be reduced. If allowed, Xtend’s patents may not be of sufficient scope or strength, and others may independently develop similar technologies or products. Further, patents held by third parties may prevent the commercialization of products incorporating Xtend’s technologies or third parties may challenge or seek to narrow, invalidate or circumvent any of Xtend’s pending or future patents. Xtend also believes that foreign patents, if obtained, and the protection afforded by such foreign patents and foreign intellectual property laws, may be more limited than that provided under United States patents and intellectual property laws. Litigation, which could result in substantial costs and diversion of effort by Xtend, may also be necessary to enforce any patents issued or licensed to Xtend or to determine the scope and validity of third-party proprietary rights. Any such litigation, regardless of outcome, could be expensive and time-consuming, and adverse determinations in any such litigation could seriously harm Xtend’s business.

Xtend also relies on unpatented trade secrets and know-how and proprietary technological innovation and expertise which are protected in part by confidentiality and invention assignment agreements with its employees, advisors and consultants and non-disclosure agreements with certain of Xtend’s suppliers and distributors. These agreements may be breached, Xtend may not have adequate remedies for any breach or Xtend’s unpatented proprietary intellectual property may otherwise become known or independently discovered by competitors. Further, the laws of certain foreign countries may not protect Xtend’s products or intellectual property rights to the same extent as do the laws of the United States.

From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to Xtend. Xtend expects that it will increasingly be subject to license offers and infringement claims as the number of products and competitors in its market grows and the functionality of products overlaps.

Others’ patents may be determined to be valid, or some or all of Xtend’s products may ultimately be determined to infringe those patents. Patent holders may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to Xtend’s products that could arise in the future, Xtend could be required to obtain licenses to the infringing technology, pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties, either on commercially reasonable terms or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if Xtend ultimately prevails. Accordingly, any infringement claim or litigation against Xtend could significantly harm its business, operating results and financial condition.

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Employees

As of December 31, 2004, Xtend had 49 full-time and temporary employees, of whom 39 were employed in Israel and 10 were employed in the United States. Of these employees, 31 were principally dedicated to research and development, manufacturing and operations and 14 were dedicated to sales, marketing and customer support. None of our U.S. employees is represented by a union.

Xtend Networks Ltd., as an Israeli company, is subject to Israeli labor laws and regulations with respect to its Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of work day and work week, minimum wages, pay for overtime, insurance for work related accidents, severance pay, prior notice and other conditions of employment.

Xtend Networks Ltd. and its Israeli employees are subject to provisions of certain collective bargaining agreements, by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern wages, cost of living expenses and other conditions of employment. Xtend Networks Ltd. provides its Israeli employees with benefits and working conditions above the required minimums. Its Israeli employees are not represented by a labor union. Xtend has not experienced any work stoppages.

Shira Computers Ltd.

On May 14, 2002, we acquired all of the outstanding ordinary shares of Shira, an Israeli privately held company that provides software products for the prepress and publishing markets (the “Software Products” segment), pursuant to a share exchange agreement. According to the agreement, we issued an aggregate of 166,667 shares of the Company’s common stock which were valued at approximately $540,000.

Due to the continuing decline in Shira’s sales, Shira’s recurring losses and its inability to penetrate the market, on August 12, 2003, Vyyo’s Board of Directors determined to cease all of Shira’s business operations and terminate all of Shira’s employees.

Segments and Geographic Information

Following the acquisition of all of the outstanding shares of Xtend on June 30, 2004, the results of Xtend’s operations were consolidated commencing July 1, 2004. Vyyo’s reportable segments are strategic businesses differentiated by nature of their products and customers, and can be described as follows:

Information on revenues and assets of the reportable operating segments:

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

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

Item 2. Properties

We are headquartered in Palo Alto, California, where we lease approximately 14,565 square feet of commercial space. Our lease for these facilities expires on April 30, 2009. These facilities are used for executive office space, including sales and marketing, finance and administration and technical customer support.

We also lease approximately 20,000 square feet of commercial space in Jerusalem, Israel under a term lease that expires on December 31, 2005. These facilities are used for research and development activities and for product assembly and testing.

We also lease approximately 9,300 square feet of commercial space in Tel Aviv, Israel under a term lease that expires on April 30, 2005. These facilities are used for research and development activities and for product assembly and testing.

On November 4, 2004, Xtend Networks Ltd. and Vyyo Ltd. entered into leases for a combined total of approximately 42,000 square feet of commercial space in the Modi’in District of Israel, near Tel-Aviv, under a 72 month term. These facilities are used for research and development activities and for product assembly and testing. It is anticipated that the research and development groups of Xtend Networks Ltd. and Vyyo Ltd. will be moved to this commercial space in Modi’in.

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On January 14, 2005, Xtend Networks, Inc. entered into a lease of approximately 5,740 square feet of office space in Norcross, Georgia. The term of the lease is 60 months from January 1, 2005. These facilities are used primarily for sales and marketing efforts.

We also lease approximately 2,250 square feet of commercial space in Beijing, China under a term lease that expires on March 31, 2005. These facilities are used for our Beijing representative office.

We believe that our current facilities will be adequate to meet our needs for the foreseeable future.

Item 3. Legal Proceedings

We are involved from time to time in litigation incidental to the ordinary course of our business activities. While the results of such litigation cannot be predicted with certainty, based on our current understanding of the facts, we do not believe that the final resolution of such matters will have a material adverse effect on our consolidated financial position or results of operations.

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

None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock has been traded on the Nasdaq National Market under the symbol “VYYO” since our initial public offering on April 5, 2000. The following table presents the high and low sales prices for our common stock in each quarter of 2003 and 2004, as reported by the Nasdaq National Market:

On February 7, 2005, the closing price of our common stock as reported on the Nasdaq National Market was $8.75 per share. As of February 7, 2005, there were approximately 100 holders of record of our common stock, which we believe represents approximately 3,300 beneficial holders.

Dividend Policy. We have never declared or paid any cash dividends on shares of our common stock. We presently intend to retain any future earnings to fund the development and expansion of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Through our Israeli subsidiaries, Vyyo Ltd. and Xtend Networks Ltd., we participate in the “alternative benefits program” under the Israeli law for the Encouragement of Capital Investments, 1959, under which we realize certain tax exemptions. If the Israeli subsidiaries distribute a cash dividend to Vyyo Inc. from income which is tax exempt, other than in the complete liquidation of the Israeli subsidiaries, as the case may be, it would be taxed at the corporate rate applicable to such income (currently between 10% to 25%). Pursuant to Article 12 of the Income Tax Treaty between Israel and the United States, in the event Vyyo Inc. were to receive a dividend from the Israeli subsidiaries from an income derived during any period for which Israeli subsidiaries are entitled to the reduced tax rate applicable to an approved enterprise under the Encouragement of Capital Investments Law (1959), then the Israeli subsidiaries, as the case may be, would be required to withhold fifteen percent of the gross amount of the dividend paid under certain conditions.

Securities authorized for issuance under equity compensation plans. The following chart sets forth certain information as of December 31, 2004, with respect to our three stock option plans, specifically our 1996 Equity Incentive Plan, our 1999 Employee and Consultant Equity Incentive Plan and our 2000 Employee and Consultant Equity Incentive Plan (collectively, the “Plans”). Currently, we are making stock option grants only out of our 2000 Employee and Consultant Equity Incentive Plan (the “EIP”). The chart does not include our 2000 Employee Stock Purchase Plan (the “ESPP”), under which (i) a total of 428,522 shares were reserved for future issuance as of December 31, 2004; and (ii) 96,352, 67,226 and 15,717 shares were issued in 2004, 2003 and 2002, respectively.

Each of the ESPP and the Plans has been approved by our stockholders. The number of shares reserved for issuance under the ESPP automatically increases on January 1^st of each year by the lesser of (i) one percent (1%) of the number of shares of the Company’s Common Stock outstanding on the last trading day of the immediately preceding fiscal year, or (ii) 100,000 shares. The number of shares reserved for issuance under the EIP

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automatically increases on January 1^st of each year by the lesser of (i) 666,666 shares, or (ii) five percent (5%) of the number of shares of the Company’s Common Stock outstanding on the last day of the immediately preceding fiscal year. On January 20, 2005, the Company’s Board of Directors terminated the ESPP.

Recent sales of unregistered securities and use of proceeds from sales of registered securities.

On May 2, 2000, we completed an initial public offering of shares of our common stock, $0.0001 par value. The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-96129). The Registration Statement was declared effective by the Securities and Exchange Commission on April 3, 2000. The initial public offering price was $40.50 per share (taking into account the 1-for-3 reverse stock split effected in August 2002) for an aggregate initial public offering of $104.8 million. After deducting the underwriting discounts and commissions of $7.3 million and the offering expenses of approximately $2.6 million, the net proceeds to us from the offering were approximately $94.9 million.

From April 3, 2000, until December 31, 2004, we used approximately $7.1 million of the net offering proceeds for purchases of property, plant and equipment, approximately $2.4 million of the net proceeds for repayment of short term debt obligations, approximately $11.4 million of the net proceeds for repurchase of our common stock, approximately $1.6 million of the net proceeds in connection with the acquisition of Xtend and approximately $72.4 million of the net offering proceeds for working capital.

On September 19, 2000, we completed an underwritten public offering of our common stock. The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-45132). The Registration Statement was declared effective by the Commission on September 13, 2000. The public offering price was $94.688 per share (taking into account the 1-for-3 reverse stock split effected in August 2002) for an aggregate public offering price of the shares we sold of $55.2 million. After deducting the underwriting discounts and commissions of $2.9 million and the offering expenses of approximately $1.0 million, the net proceeds to us from the offering were approximately $51.3 million.

From September 13, 2000, until December 31, 2004, we used approximately $0.3 million of the net offering proceeds for purchases of property, we used approximately $2.5 million of the net offering proceeds for (1) purchases of property, plant and equipment and the acquisition of Xtend, and (2) approximately $12.9 million of the net offering proceeds for working capital. Our temporary investments of the net proceeds from both of the offerings have been in cash, cash equivalents and investment grade, short-term interest bearing securities.

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Item 6. Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our 2004 annual consolidated financial statements and accompanying notes appearing elsewhere in this annual report. The matters addressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, contain forward-looking statements involving risks and uncertainties. Our actual results could differ materially

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from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” following this Management’s Discussion and Analysis section, and elsewhere in this report.

Overview

We supply end-to-end broadband access solutions used by telecommunications providers to deliver both circuit-switched services, such as telephony and T1/E1 connections, and Internet Protocol (“IP”) services, such as high-speed data and voice over IP connections, to business and residential subscribers. Our technology uses point-to-multipoint architecture to deliver services over wireless media or cable television networks. We sell our systems to system integrators, distributors and directly to service providers.

We have two business segments. The “Fixed Broadband Wireless” segment supplies broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed data and voice connections to business and residential subscribers. The “Cable Segment” represents the results of Xtend’s operations, which were consolidated commencing July 1, 2004. Xtend, which is a development stage company, provides infrastructure solutions that expand the bandwidth of cable television lines.

Starting in 2003, we believed new opportunities might develop for our traditional wireless products and began to dedicate additional resources to sales in international markets, particularly China. These opportunities, however, are developing slowly and the pricing environment is very competitive. If our sales do not substantially increase from current levels, we will continue to incur losses, and may never achieve profitability. We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future.

On June 30, 2004, we completed the acquisition of all of the outstanding shares of Xtend Networks Ltd. and its wholly-owned, U.S.-based subsidiary, Xtend Networks, Inc. (collectively, “Xtend”). Xtend provides infrastructure solutions that expand the bandwidth of cable television lines. Xtend is based in Tel Aviv, Israel and has an office in Atlanta, Georgia. Xtend has never been profitable and, as it is in a development stage, to date it has not generated any revenues. The results of Xtend’s operations were consolidated with Vyyo’s operations commencing July 1, 2004.

The acquisition of Xtend, which is currently operating as a wholly-owned subsidiary of Xtend Cable Solutions Inc., a wholly-owned subsidiary of Vyyo Inc., is intended to diversify our business and to seek to open new markets for our current products.

In connection with the Transaction:

(1) We issued 1,398,777 shares of Vyyo’s common stock and made cash payments of approximately $2,970,000 for non-competition agreements from certain employees of Xtend;

(2) Vyyo provided a contingent promissory note (“Contingent Note”) in the principal amount of $6.5 million payable on March 31, 2007. In the event that the consolidated revenues of Vyyo in the year ended December 31, 2006 equal or exceed $60 million and the consolidated gross margin of Vyyo equals or exceeds 35% during the same period, the Contingent Note shall be canceled. The Contingent Note is subject to acceleration in the event that the excess sum of the Company’s cash, cash equivalents, short term investments and accounts receivable, net of the sum of the Company’s long-term and short-term liabilities (exclusive of the Contingent Note) is less than $20 million on December 31, 2005 or on June 30, 2006;

(3) Vyyo agreed to pay a contingent cash bonus to an Xtend employee in the amount of approximately $1.2 million and granted the same employee 146,000 restricted shares, of which 71,000 shares vested over a six month period and compensation expenses were recorded (see note 11) and 75,000 shares will vest subject to designated performance criteria. The contingent cash bonus was resolved and a provision was recorded in selling and marketing expenses on September 30, 2004;

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(4) Vyyo agreed to make cash payments to certain other Xtend option holders and Xtend employees in connection with those parties’ outstanding options in Xtend. These cash payments include a payment of approximately $269,000 paid in cash at the closing of the Transaction on June 30, 2004 and a payment of approximately $255,000 which is expected to be paid over two years upon realization of certain employment conditions;

(5) Vyyo committed to contribute to Xtend up to $10 million, to be contributed in stages based on the operational needs of Xtend; and

(6) Vyyo incurred direct expenses related to the Transaction amounting to $578,000 which were capitalized as a part of the investment of Xtend.

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

The purchase price consisted of (in thousands):

The tangible and intangible net assets acquired consisted of the following (in thousands):

The fair value of the intangible assets acquired was estimated by a third party appraiser, based upon future expected discounted cash-flows.

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The amount allocated to research and development in-process represents the fair value of purchased in-process products or projects technology for research projects that, as of the acquisition date, have not reached technological feasibility and have no alternative future use. Accordingly, they were charged to the statement of operations on the date of acquisition.

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

Amortization of intangible assets acquired for the year ended December 31, 2004 was $1,045,000, consisting of the amortization of existing technology of $194,000, non-competition agreements amounting to $442,000, an exclusive sales agreement amounting to $285,000 and workforce amounting to $124,000.

Estimated future amortization expenses of intangible assets for the following years, subsequent to December 31, 2004 are as follows:

We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $21.1 million for the year ended December 31, 2004. As of December 31, 2004, our accumulated deficit was approximately $196.5 million.

Critical Accounting Policies

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

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

Revenue recognition. Revenues from our Fixed Broadband Wireless segment are derived from sales of products. We currently provide no services. Our products consist of hubs and modems, which are off-the-shelf products, sold “as is,” without further adjustment or installation. These products are usually sold individually at a standard fixed price determined by us. When establishing a relationship with a new customer, we may also sell these products together as a “package,” in which case these products are shipped at the same time to the customer. As our products are off-the-shelf products, we do not provide our customers with the right of return or any additional services after delivery (except for standard product warranty).

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Revenues from our products are recorded when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and customer acceptance requirements have been met; (3) the price is fixed or determinable; and (4) collection of payment is reasonably assured and we have no additional obligations.

Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables” addresses the accounting, by a vendor, for contractual arrangements in which multiple revenue-generating activities will be performed by the vendor. It is effective prospectively for all arrangements entered into in fiscal periods beginning after June 15, 2003.

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

Products warranty. We accrue for product warranty costs upon recognition of product revenues. The provision is calculated as a percentage of the sales based on historical experience.

Short term investments. SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable Equity Securities, provide guidance on determining when an investment is other-than-temporarily impaired. Investments are reviewed quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost; the financial health of the investee; and our intent and ability to hold the investment. Investments with an indicator are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary. If market, industry and/or investee conditions deteriorate, we may incur future impairments.

Inventories. We state inventories at the lower of cost or market. We regularly evaluate the carrying value of our inventories. Cost includes labor and material for finished goods and work-in-process. We estimate average selling prices for our products based on current selling prices, estimates of demands for our products, general economic trends and other information. Estimating these average selling prices is a highly subjective process. We determine expected inventory usage based on demand forecasts. Inventory reserves are established based on forecasted demand, past experience with the specific customers and the ability to redistribute inventory to other customers.

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

Acquired research and development in-process. Acquired products or projects which have achieved technical feasibility are capitalized as intangible assets, since it is probable that the costs will give rise to future economic benefits. Acquired products or projects which have not achieved technical feasibility are charged to the statement of operations on the date of acquisition.

Stock-based compensation. In December 2002, the FASB issued SFAS No. 148—Accounting for Stock-Based Compensation—Transition and Disclosure (“FAS 148”). This statement amends SFAS No. 123—Accounting for Stock-Based Compensation, providing alternative methods of voluntarily transitioning to the fair market value based method of accounting for stock based employee compensation. FAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method in

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both the annual and interim financial statements. The Company elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations. Under the provisions of APB No. 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price. In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, “Share-Based Payment” (“FAS 123R”), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. This statement eliminates the ability to account for employee share-based payment transactions using APB No. 25 and requires instead that such transactions be accounted for using the grant-date fair value based method. This statement will be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 (July 1, 2005 for the Company). We are currently considering early adoption of FAS 123R as of January 1, 2005.

This discussion and analysis should be read in conjunction with our condensed consolidated interim financial statements and related notes included elsewhere in this report.

Results of Operations

Revenues for Years Ended December 31, 2004, 2003 and 2002

Revenues from our Fixed Broadband Wireless segment are derived from sales of products. We currently provide no services. These products consist of hubs and modems, which are off-the-shelf products, sold “as is,” without further adjustment or installation. These products are usually sold individually according to a standard fixed price determined by us. When establishing a relationship with a new customer, we may also sell these products together as a “package,” in which case these products are shipped at the same time to the customer. As our products are off-the-shelf products, we do not provide our customers with the right of return or any additional services after delivery (except for standard product warranty).

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

Revenues did not change significantly in 2004 from 2003 and increased by 32% in 2003 from 2002. Revenues were $6.1 million in 2004, $6.1 million in 2003 and $4.6 million in 2002. There were no revenues from the Cable segment in the six months ended December 31, 2004. In 2004, our revenues from Asia decreased to $3.9 million from $4.6 million in 2003 and revenues from North America increased to $1.6 million from $1.2 million in 2003. The decrease in revenues in Asia in 2004 as compared with 2003 primarily reflects the slowdown in capital spending for broadband wireless equipment in China. The increase in revenues in 2003 from

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2002, was primarily due to the increased shipments of our products, particularly to the China market. Revenues in 2004, 2003 and in 2002 include revenues of approximately $1 million, $3.2 million and $1.2 million, respectively, from sales of inventory that was previously written down to $0 in 2001. As a result of the write-down in 2001, the cost of revenues associated with sales of this inventory was accounted for as $0.

Cost of Revenues

Cost of revenues consists of component and material costs, direct labor costs, warranty costs, royalties in connection with Israeli government incentive programs and overhead related to manufacturing our products.

Cost of revenues was $4.2 million in 2004, $2 million in 2003 and $590,000 in 2002. The increase in cost of revenues, and the decrease in gross margin, in 2004 compared with 2003 and with 2002, were primarily attributable to (1) $0.2 million amortization of technology resulting from the acquisition of Xtend in 2004, (2) increased shipments of our products in 2004, (3) increased fixed cots, and (4) expenses related to our efforts to acquire potential revenue with our customers. In addition, as a result of the write-down of inventories to $0 in 2001, cost of revenues does not include $435,000 in 2004, $1.7 million in 2003 and $1.1 million in 2002 related to the sale of such inventories. We anticipate that our gross margins will continue to fluctuate and that our cost of revenues will increase in future periods.

We have participated in several Israeli government research and development incentive programs under which we received research and development participation grants of approximately $4.4 million. We are obligated to pay royalties to the granting organizations at rates that generally range from 2.5% to 5% of revenues resulting from the funded projects up to maximum amounts ranging between 100% and 150%, depending upon various factors, of the funded amount. As of December 31, 2004, we had repaid or provided for the repayment of grants in a total amount of $1.3 million.

Research and Development Expenses

Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Substantially all of our research and development activities are carried out in our facilities in Israel. These expenses are charged to operations as incurred. Our research and development expenses were $6.9 million in 2004, $4.4 million in 2003, and $3.9 million in 2002. Research and development expenses included approximately $2.1 million from the Cable segment during the year ended December 31, 2004. The increase in research and development expenses in 2004 from 2003 was due to our research and development efforts for our Cable segment and for new wireless products. The increase in research and development expenses in 2003 compared with 2002 was due to an increase in development efforts for new wireless products and increasing our workforce. We anticipate that research and development expenses will increase in future periods as we increase our efforts to develop new products.

Acquisition of Research and Development in Process

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

Selling and Marketing Expenses

Sales and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and expenses for travel, trade shows and promotional activities. Sales and marketing expenses were $8.1 million in 2004, $4.1 million in 2003, and $3.4 million in 2002. Sales and marketing expenses included approximately $3.2 million from the Cable segment during the year ended December 31, 2004, which

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includes $1.2 million accrued for a relocation bonus to a certain Xtend employee and $539,000 for stock-based compensation. The increase in sales and marketing expenses in 2004 compared with 2003 was due to (1) an increase in sales efforts for our wireless products in China and other new markets, (2) increasing our workforce, (3) expenses related to our efforts to acquire new customers and (4) the Cable segment’s sales and marketing expenses. The increase in sales and marketing expenses in 2003 compared with 2002 was due to (1) an increase in sales efforts for our wireless products in China and other new markets, including expenses from a marketing agreement with one of our Chinese OEM customers amounting to $880,000 and (2) increasing our workforce. We anticipate that sales and marketing expenses will increase in future periods as we increase our efforts to develop Xtend’s business and to sell our products.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, human resources and legal. General and administrative expenses were $6.3 million in 2004, $5.1 million in 2003 and $6.1 million in 2002. General and administrative expenses included approximately $253,000 from the Cable segment during the year ended December 31, 2004. The increase in general and administrative expenses in 2004 was primarily due to (1) increases in salaries and professional fees, (2) the Cable segment’s general and administrative expenses and (3) internal expenses related to the Xtend transaction which were not capitalized to the Xtend investment. The decrease in general and administrative expenses in 2003 compared with 2002 was primarily due to a decrease in travel expenses, a decrease in insurances expenses and charges for stock compensation of approximately $128,000 recorded in 2003 compared with $480,000 recorded in 2002. The decrease was partially offset by an increase in professional fees in 2003. The decrease was partially offset by an increase in directors’ and officers’ insurance costs and a charge of approximately $463,000 for severance costs. General and administrative expenses also included expenses of $770,000 in 2004, $698,000 in 2003 and $583,000 in 2002, paid to an unaffiliated third party management company in connection with several charters of an aircraft for business travel purposes. In 2004, $223,000 out of $770,000 was paid for flights in connection with the Company’s acquisition of Xtend and was expensed during 2004.

While we chartered the aircraft directly from the management company, the chartered aircraft is leased by Harmony Management, Inc., of which Davidi Gilo and a trust for his benefit are the sole shareholders. Payments made by us to the management company for the aircraft charters were ultimately paid to Harmony Management, after deductions for certain operating costs and charter management fees. Harmony Management has advised us that the hourly rate charged by the management company for these charters was substantially less than the standard rate charged for similar charters to other unaffiliated parties.

Amortization of Intangible Assets

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

Amortization of intangible assets acquired for the year ended December 31, 2004, was $1,045,000, consisting of the non-competition agreements amounting to $442,000; an exclusive sales agreement amounting to $285,000; workforce amounting to $124,000; and an amortization of existing technology of $194,000, which was classified to the cost of revenues.

Restructuring Adjustments

In 2001, the Company implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in the telecommunication sector and the economy in general. In 2001, the Company recorded charges of $12.8 million, related to excess facilities, abandoned equipment and employees’

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severance and other, related benefits. The restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of the Company’s workforce. The restructuring utilizations are summarized as follows:

Restructuring expenses in 2004 of $21,000 are due to an adjustment in the stock option compensation accounted for as variable plan. The options were granted to the former CEO as a part of the restructuring.

Interest Income, Net

Interest income, net, includes interest and investment income, foreign currency remeasurement gains and losses. Net interest income decreased to $508,000 in 2004 from $1.4 million in 2003, and decreased to $1.4 million in 2003 from $2.6 million in 2002. Our interest income is derived mainly from our cash and cash equivalents and short-term investment balances from proceeds from our initial and follow-on public offerings effected in 2000.

Income Taxes

As of December 31, 2004, we had approximately $84 million of Israeli net operating loss carryforwards from our Israeli subsidiary, $29.4 million of United States federal net operating loss carryforwards, and $14.6 million of state net operating loss carryforwards. The Israeli net operating loss carryforwards have no expiration date and have not been recorded as tax assets because the losses are expected to be utilized during a tax exempt period. The United States federal net operating loss carryforwards expire in various amounts between the years 2011 and 2024. The state net operating loss carryforwards expire in various amounts between the years 2005 and 2010. We have provided a full valuation allowance against our United States federal and state deferred tax assets as the future realization of the tax benefit is not sufficiently assured.

Charge for Stock Based Compensation

Charge for stock compensation represents the amortization of deferred compensation charges which are based on the aggregate differences between the respective exercise price of stock options and purchase price of stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting purposes, as well as stock compensation charges incurred in connection with modifications of stock awards in 2001. Deferred stock compensation is amortized over the vesting period of the underlying options. Charges related to stock compensation were $669,000 in 2004, associated with separation agreements and option grant agreements related to a variable accounting plan. Charges related to stock compensation were $1.4 million in 2003, associated with separation agreements and option grant agreements related to a variable accounting plan. Amortization and charges related to stock compensation were $813,000 in 2002 (including a charge of $291,000 associated with separation agreements with two of our employees net of a decrease in compensation of $152,000 related to a variable accounting plan in the first quarter of 2002).

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The charges for stock compensation relating to the continuing operations are as follows:

Discontinued Operations