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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended March 31, 2005

or

For the transition period from              to             

Commission File Number 000-30189

VYYO INC.

(Exact name of registrant as specified in its charter)

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

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

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

As of May 10, 2005, there were 15,301,555 shares of Common Stock outstanding.

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INDEX

VYYO INC.

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Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Vyyo Inc.

Condensed Consolidated Balance Sheets

(In Thousands)

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

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Vyyo Inc.

Condensed Consolidated Statements of Operations

(In Thousands Except Per Share Data)

(Unaudited)

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

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Vyyo Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

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

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

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

Organization and Principles of Consolidation

The consolidated financial statements include the accounts of Vyyo Inc. and its wholly-owned subsidiaries (collectively, “Vyyo” or the “Company”). Following the acquisition of all of the outstanding shares of Xtend Networks Ltd. (“Xtend”) on June 30, 2004, the results of Xtend’s operations were consolidated commencing July 1, 2004. All material inter-company balances and transactions have been eliminated in consolidation.

Vyyo operates in two segments. The first operating segment is the “Fixed Broadband Wireless” segment. 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 Company sells these systems directly to service providers, as well as to system integrators that deploy the Company’s systems as part of their end-to-end network solutions for service providers.

The second operating segment is the “Cable” segment. On June 30, 2004, the Company acquired all of the outstanding shares of Xtend, an Israeli privately-held company, that is a development stage enterprise. Xtend provides infrastructure solutions that expand the bandwidth of cable television lines and leverages Vyyo’s Data Over Cable System Interface Specification (DOCSIS®)-based hub to enable cable companies to offer voice grade T1 circuit-switched products. (see note 3).

On August 12, 2003, the Company’s Board of Directors determined to cease its software business operated by Shira Computers Ltd. (“Shira”), a wholly-owned subsidiary of the Company, and terminate all of Shira’s employees. Prior to the cessation of operations, Shira operated in the “Software Products” segment. The cessation of Shira’s operations represents a disposal of a business segment under Statement of Financial Accounting Standards (“SFAS”) No. 144 (“Accounting for the Impairment or Disposal of Long-Lived Assets”). Accordingly, the results of the software segment have been classified as discontinued operations, and prior periods have been reclassified respectively.

On March 31, 2005, the Company sold all of its shares of Shira to third parties (see also note 4).

Summary of Significant Accounting Principles

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

Use of Estimates

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

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Short Term Investments

Pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company’s investments in debt securities have been designated as available-for-sale. Available-for-sale securities are carried at fair value, which is determined based upon the quoted market prices of the securities, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a component of shareholders’ equity until realized. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income, net. The Company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the Company has classified all investments as short-term under “short term investments”, even though the stated maturity date may be one year or more from beyond the current balance sheet date. Interest, amortization of premiums, accretion of discounts, and dividends on securities classified as available-for-sale are included in interest income, net. In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new annual disclosure requirements for investments that are deemed temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1 (however, the disclosure requirements remain effective). The Company will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released. The Company has recorded $112,000 financial expenses for the period of three months ended March 31, 2005 for an other then temporary impairment in its available for sale securities.

Inventory

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

During the year 2001, the Company wrote down excess inventory and purchase commitments of $8.45 million. The write-down was charged to the cost of revenues. There were no revenues in the three months ended March 31, 2005 from inventory previously written-down to $0. In the three months ended March 31, 2004, inventory that was previously written-down to $0 by taking a charge of $286,000 was sold for the amount of $661,000.

Intangible Assets

The Company’s intangible assets relate to the acquisition of Xtend and consist of technology, non-competition agreements, an exclusive sales agreement and workforce. These definite-life intangible assets are amortized using the straight-line method over their estimated useful lives, ranging between one and six years (see note 3).

Impairment of Long-Lived Assets

SFAS 144 requires that long-lived assets including certain intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount, an impairment loss would be recognized, and the assets are written down to their estimated fair values.

Foreign Currency Transactions

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

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

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Revenue Recognition

Revenues from the Fixed Broadband Wireless segment are derived from sales of products. The Company currently provides 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 the Company. When establishing a relationship with a new customer, the Company may also sell these products together as a “package,” in which case these products are shipped at the same time to the customer. As the Company’s products are off-the-shelf products, the Company does not provide its customers with the right of return or any additional services after delivery (except for standard product warranty).

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

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

Loss per Share

Basic and diluted losses per share are presented in accordance with SFAS No. 128, “Earnings per share” (“SFAS 128”), for all periods presented.

Employee Stock-Based Compensation

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

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

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Employee Stock-Based Compensation (continued)

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

Proforma information regarding net loss and loss per share, required under SFAS No. 123 has been determined as if the Company had accounted for its stock options and restricted shares under the fair value method of SFAS No. 123. The fair value for stock options and restricted shares was estimated at the date of each option grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three months ended March 31, 2005 and 2004: risk-free interest rates ranging from 1.2% to 4.5%; dividend yields of zero; a weighted-average expected life of the options of approximately 2.5 and 3.58 years; and volatility ranging from 0.732 to 1.021.

The Company’s proforma information is as follows:

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Reclassifications

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

Recent accounting pronouncements –

FAS 123 (revised 2004) Share-based Payment

In December 2004, the Financial Accounting Standards Board issued the revised Statement of Financial Accounting Standards 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 Opinion No. 25, Accounting for Stock Issued to Employees, 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). Early adoption of FAS 123R is encouraged.

On April 15, 2005, the Securities and Exchange Commission approved a new rule, under which FAS 123R is effective for public companies at the beginning of their next fiscal year that begins after June 15, 2005 (first quarter of 2006 for the company). This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the proforma disclosure under FAS 123.

The Company estimates that the cumulative effect of adopting FAS 123R as of its adoption date by the Company (January 1, 2006), based on the awards outstanding as of March 31, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to March 31, 2005 and prior to our adoption of FAS 123R. The Company expects that upon the adoption of FAS 123R, it will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, the Company’s financial statements for periods prior to the effective date of the Statement will not be restated. The impact in 2006 and beyond will depend upon various factors, among them the Company’s future compensation strategy.

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

2. Inventory

Inventory is comprised of the following:

3. Acquisition of Xtend

On June 30, 2004, the Company acquired all of the outstanding shares of Xtend (the “Transaction”), an Israeli privately-held, company which is a development stage enterprise. Xtend provides infrastructure solutions that expand the bandwidth of cable television lines. The Transaction allows the Company to diversify its business by adding a different field of operation to its fixed broadband wireless business. The results of Xtend’s operations were consolidated with the Company’s operations commencing July 1, 2004.

In connection with the Transaction:

The Company issued 1,398,777 shares of the Company’s common stock and made cash payments of approximately $2,970,000 for non-competition agreements from certain employees of Xtend.

The Company provided a contingent promissory note (“Contingent Note”) in the principal amount of $6.5 million payable on March 31, 2007. In the event that the consolidated revenues of the Company in the year ended December 31, 2006 equal or exceed $60 million and the consolidated gross margin of the Company equals or exceeds 35% during the same period, the Contingent Note shall be canceled. The Contingent Note is subject to acceleration in the event that the excess sum of the Company’s cash, cash equivalents, short term investments and accounts receivables, net of the sum of the Company’s long-term and short-term liabilities (exclusive of the Contingent Note) is less than $20 million on December 31, 2005 or on June 30, 2006 (see also note 7);

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

The Company agreed to make cash payments to certain other Xtend option holders and Xtend employees in connection with those parties’ outstanding options 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 conditions.

As Xtend is a development stage enterprise that has not yet commenced its planned principal operations, the Company accounted for the Transaction as an acquisition of net assets pursuant to the provisions of SFAS 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; and

The Company incurred direct expenses related to the Transaction amounting to $578,000, which were capitalized as a part of the investment of Xtend.

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

3. Acquisition of Xtend (continued)

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

The fair value of the intangible assets acquired was estimated by a third party appraiser, based upon future expected discounted cash-flows in the fourth quarter of 2004.

Amortization of intangible assets acquired for the three months ended March 31, 2005 was $509,000 consisting of the amortization of existing technology of $92,000, non-competition agreements amounting to $220,000 an exclusive sales agreement amounting to $135,000 and workforce amounting to $62,000.

Estimated amortization expenses of intangible assets for the following years subsequent to March 31, 2005 are as follows:

4. Shira – Discontinued Operations

Assets and liabilities of the discontinued operation are as follows:

Profit and loss of the discontinued operations were as follows:

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

4. Shira – Discontinued Operations (continued)

Profit and Loss from discontinued operations includes -

a) The Company did not incur any severance expenses or termination of contractual obligations, accounted for according to SFAS 146 (“Accounting for costs associated with exit or disposal activities”), during the three months ended March 31, 2005. The Company settled all severance expenses and termination of contractual obligations as of December 31, 2004. During the three months ended March 31, 2004 the Company paid $77,000 in severance expenses and termination of contractual obligations.

b) Sale of Shira

On March 31, 2005 the Company sold all of its shares of Shira to third parties (hereafter – the “Purchasers”). According to the agreement, the Purchasers shall pay the Company 22.5% to 42.5% of the proceeds that may be received upon the further sale by the Purchasers of Shira or its assets. The Purchasers have assumed all liabilities of Shira totaling to $270,000. The gain from this sale was $290,000 and was recorded in discontinued operations.

5. Accrued Liabilities

Accrued liabilities consist of the following:

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

6. Severance Liabilities

The amounts paid related to severance and severance expenses were:

7. Contingency

Regarding contingent consideration related to acquisition of Xtend, see note 3.

8. Former Chief Executive Officer separation agreement

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

Combined accounting is being applied to the 266,667 options issued and the related loan secured by such options. This results in variable accounting for the 266,667 options, with a minimum expense being recorded of $1 million. The total adjustments for the three months ended March 31, 2005 and 2004 associated with these options were income adjusts of $315,000 and $501,000, respectively. The charges were recorded as restructuring adjustments.

9. Comprehensive Loss

The components of comprehensive loss are as follows:

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

10. Segment Reporting

Following the acquisition of Xtend, as described in note 3 above, the Company’s business is divided into two segments: “Fixed Broadband Wireless” and “Cable.” The results of Xtend’s operations were consolidated commencing July 1, 2004.

Assets:

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

10. Segment Reporting (continued)

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

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Vyyo Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

10. Segment Reporting (continued)

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

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Item 2. 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 consolidated financial statements and accompanying notes appearing elsewhere in this quarterly 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 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 enterprise, provides infrastructure solutions that expand the bandwidth of cable television lines.

Starting in 2004, we believed new opportunities might develop for our traditional wireless products and began to dedicate additional resources to sales in the utilities and oil and gas markets and other national and international markets. These opportunities, however, are developing slowly and the environments are very competitive. Further, we have reduced our resources in Asia to better align them with the near-term opportunities. 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 and leverages Vyyo’s Data Over Cable System Interface Specification (DOCSIS®)-based hub to enable cable companies to offer voice grade T1 circuit-switched products. Xtend is based in 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.

Vyyo provided a contingent promissory note (“Contingent Note”) in a 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 Vyyo’s cash, cash equivalents, short term investments and accounts receivables, net of the sum of Vyyo’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.

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

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 acquisition and a payment of approximately $255,000 which is expected to be paid over two years upon realization of certain conditions.

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

The fair value of the intangible assets acquired was estimated by a third party appraiser, based upon future expected discounted cash-flows in the fourth quarter of 2004.

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

Amortization of intangible assets acquired for the three months ended March 31, 2005 was $509,000, consisting of the amortization of existing technology of $92,000, non-competition agreements amounting to $220,000, an exclusive sales agreement amounting to $135,000 and workforce amounting to $62,000.

Estimated future amortization expenses are as follows:

Critical Accounting Policies

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

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. 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).

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.

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EITF Issue 00-21 addresses when and, if so, 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.

Short Term Investments

Pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” Vyyo’s investments in debt securities have been designated as available-for-sale. Available-for-sale securities are carried at fair value, which is determined based upon the quoted market prices of the securities, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a component of shareholders’ equity until realized. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income, net. Vyyo views its available-for-sale portfolio as available for use in its current operations. Accordingly, Vyyo has classified all investments as short-term under “short term investments”, even though the stated maturity date may be one year or more from beyond the current balance sheet date. Interest, amortization of premiums, accretion of discounts, and dividends on securities classified as available-for-sale are included in interest income, net. In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new annual disclosure requirements for investments that are deemed temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1 (however, the disclosure requirements remain effective). We will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released. Vyyo has recorded $112,000 financial expenses for the period of three months ended March 31, 2005 for an other then temporary impairment in its available for sale securities.

Inventory

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

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.

Intangible assets

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

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

Recent Accounting Pronouncements

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 Vyyo obtains employee services in exchange for (a) equity instruments of Vyyo or (b) liabilities that are based on the fair value of Vyyo’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 Opinion No. 25, Accounting for Stock Issued to Employees, 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 Vyyo). Early adoption of FAS 123R is encouraged.

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On April 15, 2005, the Securities and Exchange Commission approved a new rule, under which FAS 123R is effective for public companies at the beginning of their next fiscal year that begins after June 15, 2005 (first quarter of 2006 for Vyyo). This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the proforma disclosure under FAS 123.

We estimate that the cumulative effect of adopting FAS 123R as of its adoption date by Vyyo (January 1, 2006), based on the awards outstanding as of March 31, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to March 31, 2005 and prior to our adoption of FAS 123R. We expect that upon the adoption of FAS 123R, it will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, Vyyo’s financial statements for periods prior to the effective date of the Statement will not be restated. The impact in 2006 and beyond will depend upon various factors, among them Vyyo’s future compensation strategy.

Results of Operations

Revenues

Revenues decreased to $704,000 in the first quarter of 2005 from $2.2 million in the first quarter of 2004. The decrease in revenues in the first quarter of 2005 was due to the decreased shipments of our products as well as lower selling prices as a result of competitive price pressure. For the three months ended March 31, 2005 revenues do not include revenues from sales of inventory that was previously written down to $0; during the three months ended March 31, 2004 revenues include $661,000 of previously written down inventory.

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

Cost of Revenues

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

Cost of revenues decreased to $786,000 in the first quarter of 2005 from $1.0 million in the first quarter of 2004. The decrease in cost of revenues in the first quarter of 2005 was primarily attributable to the decrease in shipments of our products and decreasing expenses related to our efforts to acquire new customers. As a result of the write-down of inventories to $0 in 2001, cost of revenues does not include $286,000 in the first quarter of 2004, related to the sale of such inventories. Our gross margin in the first quarter of 2005 decreased from the gross margin in the first quarter of 2004 primarily due to competitive price pressure in our markets, and decrease shipments therefore increase the effect of the fixed costs. We anticipate that our gross margins will continue to fluctuate and that our cost of revenues will increase in future periods to the extent that we deplete our previously written-down inventories and sell products from newly acquired inventories.

Research and Development 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

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operations as incurred. Our research and development expenses increased to $2.7 million in the first quarter of 2005 from $1.2 million in the first quarter of 2004. Research and development expenses included approximately $1.6 million from the Cable segment in the first quarter of 2005. The increase in research and development expenses in the first quarter of 2005 was due to our research and development efforts for our new Cable segment as well as an increase in our workforce. In addition, on November 4, 2004, two of our subsidiaries entered into new leases for approximately 42,000 square feet of office space near Tel-Aviv, Israel, which leases are expected to involve significant rent and fee payments. We anticipate that research and development expenses will increase in future periods as we increase our efforts to develop new products.

Selling and Marketing

Sales and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and expenses for travel, trade shows and promotional activities. Sales and marketing expenses increased to $2.7 million in the first quarter of 2005 from $1.4 million in the first quarter of 2004. The increase in sales and marketing expenses in the first quarter of 2005 was due to (1) an increase in sales and marketing expenses, including approximately $1.3 million attributable to the new Cable segment in the first quarter of 2005, (2) an increase in sales efforts for our wireless products in the utilities and gas markets and other new markets and (3) an increase in our workforce. We anticipate that sales and marketing expenses will increase in future periods as we increase our efforts to sell our products in the Cable segment and other new markets.

General and Administrative

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, and legal. General and administrative expenses in the first quarter of 2005 were $1.5 million and $1.4 million in the first quarter of 2004. General and administrative expenses were consistent for the three month periods ended March 31, 2005 and 2004. General and administrative expenses are currently expected to be higher in 2005 compared to 2004 for the implementation of internal controls over financial reporting relating to Sarbanes-Oxley compliance. General and administrative expenses also included expenses of $159,000 in the first quarter of 2005, and $194,000 in the first quarter of 2004, which includes payments to Harmony Management, Inc., a corporation owned by Davidi Gilo, pursuant to an aircraft time sharing agreement and to an unaffiliated third party management company, in connection with several charters of an aircraft for business travel purposes.

Amortization of Intangible Assets

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

Amortization of intangible assets acquired for the three months ended March 31, 2005 was $509,000, consisting of the amortization of existing technology of $92,000, non-competition agreements amounting to $220,000, an exclusive sales agreement amounting to $135,000 and workforce amounting to $62,000.

Restructuring Charges

In 2001, we implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in the telecommunications sector and the general economy. In connection with the restructuring program, we recorded a restructuring income in the first quarter of 2005 of $315,000 from a positive adjustment with respect to a variable compensation plan related to our former Chief Executive Officer. There are no other severance expenses or termination of contractual obligations payments attributable to the restructuring.

Interest Income, Net

Interest income, net, includes interest from investment income, foreign currency remeasurement gains and losses. Net interest income was $76,000 in the first quarter of 2005 and $253,000 in the first quarter of 2004. Interest income for the first quarter was approximately $177,000 offset by an Other-Than-Temporary investment impartment of $112,000 attributable to the effect of rising interest rates on the Company’s fixed interest debt investments that potentially may not be held until maturity. Our interest income is derived mainly from our cash and short-term investment balances from proceeds from our initial and follow-on public offerings effected in 2000. We expect that our interest income will continue to decrease due to decreasing cash balances.

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Income Taxes

As of December 31, 2004, Vyyo’s Israeli subsidiaries (excluding Shira) had net operating loss carryforwards of approximately $84 million. The Israeli loss carryforwards have no expiration date.

Vyyo’s Israeli subsidiaries have been granted in the past “approved enterprise” status for several investment programs. These programs entitle the Israeli subsidiaries (the “Subsidiaries”) to tax exemption periods, ranging from two to six years, on undistributed earnings commencing in the year in which they attain taxable income as well as a reduced corporate tax rate of 10%-25% for the remaining term of the program on the plan’s proportionate share of income.

Since the Subsidiaries have not achieved taxable income, the tax benefits periods have not yet commenced. The Subsidiaries losses are expected to offset certain future earnings of the Subsidiaries during the tax-exempt period; therefore, the utilization of the net operating losses will generate no tax benefits. Accordingly deferred tax assets from such losses have not been included in the financial statements. The entitlement to the above benefits is conditional upon the Subsidiaries fulfilling the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in approved enterprises. 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. Deferred stock compensation is amortized over the vesting period of the underlying options. Net income related to stock compensation of $261,000 in the first quarter of 2005 resulted from (1) a separation agreement (including income adjustments of $315,000 in the first quarter of 2005 associated with a separation agreement with our former Chief Executive Officer recorded as a restructuring adjustment) and (2) option grants to service providers accounted at a fair value based method.

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Discontinued Operation

Assets and liabilities of the discontinued operation were as follows:

Profit and loss of the discontinued operations were as follows:

Income (loss) from discontinued operations includes:

(a) We did not incur any severance expenses or termination of contractual obligations, accounted for according to SFAS 146 (“Accounting for costs associated with exit or disposal activities”), during the three months ended March 31, 2005. We settled all severance expenses and termination of contractual obligations as of December 31, 2004. During the three months ended March 31, 2004 Vyyo paid $77,000 in severance expenses and termination of contractual obligations.

(b) Sale of Shira: On March 31, 2005 Vyyo sold all of its shares of Shira to third parties (hereafter the “Purchasers”). According to the agreement, the Purchasers shall pay Vyyo 22.5% to 42.5% of the proceeds that may be received upon the further sale by the Purchasers of Shira or its assets. The Purchasers have assumed all liabilities of Shira totaling to $270,000. The gain from this sale was $290,000 and was recorded in discontinued operations.

Liquidity and Capital Resources

As of March 31, 2005, we had $34.3 million of cash, cash equivalents and short-term investments. In the first three months of 2005, net cash used in operations was $7.7 million, comprised mainly of (1) our loss of $6.7 million, (2) changes in other working capital accounts of $1.5 million, and (3) non-cash charges of (a) depreciation and amortization of $0.8 million (b) income related to stock compensation of $0.3 million. In the first three months of 2004, net cash used in operations was $2.2 million, comprised mainly of (1) our net loss of $2.1 million, (2) changes in other working capital accounts of $0.3 million, and (3) non-cash charges of (a) depreciation and amortization of $0.1 million, and (b) income related to stock compensation of $0.5 million.

In the first three months of 2005, net cash provided by investing activities was $4.2 million comprised of our sales and maturities of short-term investments net of our purchase of short-term investments of $4.7 million, partially offset by an outflow from purchases of property and equipment amounting to $0.5 million. In the first three months of 2004, net cash provided by investing activities was $5.9 million, comprised mainly of our purchase of short-term investments net of our proceeds from sales and maturities of short-term investments of $6 million.

Financing activities in the first three months of 2005 amounted to approximately $0.2 million of proceeds from stock option exercises and proceeds from notes receivable from shareholders. Financing activities in the first three months of 2004 amounted to approximately $0.3 million of proceeds from stock option exercises.

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

RISK FACTORS

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

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

We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. We incurred losses of approximately $6.7 million for the three months ended March 31, 2005 and $21.1 million in the year ended December 31, 2004. As of March 31, 2005, our accumulated deficit was approximately $203 million. In addition, we recently increased our sales and marketing expenditures and research and development expenditures in connection with our efforts to develop new sources of revenue. Our revenues and gross margins may not grow or even continue at their current level and may decline even further. If our revenues do not rapidly increase, or if our expenses increase at a greater pace than our revenues, we will never become profitable.

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

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

If Xtend fails to achieve significant market penetration and customer acceptance of its products, its prospects would be substantially harmed.

The market for broadband products in the cable television industry is extremely competitive, subject to drastic technological changes and highly fragmented. Xtend has not generated any revenue. Its products are new and relatively unknown. To date, Xtend has only begun to install its product with customers in field trials. There can be no assurance that Xtend’s initial installations will be successful. As an early stage operation, Xtend may face challenges such as market resistance to a new product, perceptions regarding customer support and quality control.

Xtend will generate significant sales only if it is able to penetrate this market and create market share in this industry. If Xtend is unable to do so, its business would be harmed and its prospects significantly diminished.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Xtend will need to develop distribution channels and management resources to market and sell its products.

Xtend is at a very early stage in the commercialization of its products. Xtend currently has strictly limited relationships with potential customers and distributors as well as limited professional sales staff. Xtend will be successful only if it is able to develop distribution channels to market and sell its products.

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

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Xtend currently has limited exposure to global business opportunities. It will not be able to take advantage of any meaningful potential global demand for its products unless and until it is able to develop global distribution channels and strategies.

Xtend has not yet manufactured or deployed its products in high volumes.

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

Because Xtend’s products have not yet been deployed in high volume, there is significant technology risk associated with any such future deployment. There can be no assurances that any such high volume deployment would be successful.

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

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

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

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

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

Our participation or lack of participation in industry standards groups, such as the WiMax Forum, may adversely affect our business.

Neither Vyyo Inc. nor Xtend is currently active in the standards process of the Cable Television Laboratories, Inc., a cable industry consortium that establishes cable technology standards and administers compliance testing. In the future, we may determine to join or not join other standards or similar organizations. Our membership in these organizations could dilute our proprietary intellectual property rights in our products while our failure to participate in others could jeopardize acceptance of any of our products that do not meet industry standards.

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Product standardization, as may result from the WiMax initiative or from initiatives of the major cable operators, may adversely affect our prospects and those of Xtend.

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

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

Sales outside of North America accounted for approximately 49% of our revenues in the first quarter of 2005. In addition, we maintain research and development facilities in Israel. Our reliance on international sales, operations and suppliers exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We sell our broadband access equipment and systems based on individual purchase orders. Our customers are generally not obligated by long-term agreements to purchase our systems, and the agreements we have entered into do not obligate our customers to purchase a minimum number of systems. Our customers can generally cancel or reschedule orders on short notice and discontinue

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using our systems at any time. Further, having a successful field system trial does not necessarily mean that the customer will order large volumes of our systems. The reduction, delay or cancellation of orders from one or more of our customers could seriously harm our operating results.

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

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

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

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

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