In recent years, communications networks have experienced a significant increase in the volume, variety and complexity of communications traffic. In the past, communications traffic consisted primarily of traditional voice communications and simple data traffic, such as facsimile and Internet email. An increasing proportion of today's communications traffic consists of digital media, including voice, video and data content.

A variety of service providers, including telephone, cable and, increasingly, wireless operators, now seek to offer a broadband connection that permits end users to receive diverse digital media applications simultaneously within their homes, including voice, video and high-speed Internet access.

Traditional telephone service providers, in particular, have faced significant challenges in delivering triple-play services, because the

copper-based networks that these service providers currently rely upon are inherently bandwidth constrained and thus not capable of supporting next-generation digital media applications. In addition, telephone service providers have lost revenue from their traditional voice business as consumers are increasingly relying on mobile phone and VoIP services instead of fixed line services.

According to Gartner, worldwide fixed telecom consumer voice service revenues are expected to decline from $124.7 billion in 2004 to $97.1 billion in 2009. Moreover, recent regulatory changes have allowed cable TV service providers to offer voice and data services, and these operators have already made inroads in capturing subscribers from telephone service providers. The continued loss of fixed line voice revenue is driving telephone service providers to focus on making investments necessary to provide triple-play services.

required for triple-play capable OLTs in central office equipment and ONUs in customer premise equipment, deployed within a passive optical network. The Company offers complete solutions and enables its OEM customers to reliably and rapidly introduce

systems that incorporate its products.

The Company’s central office Fiber to the Home solutions provides the core functionality required for passive optical network equipment, including OLTs, line-cards, remote-terminal interfaces and other equipment. The Company’s current products are based on the IEEE 802.3ah EPON industry standard.

The Company introduced its first generation Fiber to the Home solution for the central office, the PAS5001 Gigabit Ethernet PON OLT system-on-a-chip, in the third quarter of 2003. The Company currently is shipping its second generation Fiber To The Home solution, the PAS5001-N, a Gigabit Ethernet PON OLT system-on-a-chip, that it introduced in the first quarter of 2004.

The PAS5001-N includes support for the Company’s IEEE 802.3ah Gigabit Ethernet PON Media Access Controller. It also includes management functions using the IEEE 802.3ah Operation, Administration, and Maintenance protocol and quality of service functionality using the IEEE 802.1p standard to prioritize switch traffic. The PAS5001-N has a programmable Dynamic Bandwidth Allocation engine, as well as integrated encryption for enhanced security and privacy.

Customer Premise Fiber To The Home solutions provide the core functionality for ONU systems. The Company’s products support the IEEE 802.3ah EPON industry standard.

The Company introduced its first generation Fiber to the Home solutions for the customer premise, its PAS6001-A Gigabit Ethernet PON ONU and the PAS6001-B Gigabit Ethernet PON ONU integrated circuits, in the second quarter of 2003. The Company introduced its second generation Fiber to the Home solutions for the customer premise, the PAS6001-NA Gigabit Ethernet PON ONU and the currently shipping PAS6001-NB Gigabit Ethernet PON ONU integrated circuits in the first quarter of 2004.

Gross profit was $11.8 million for the six months ended June 30, 2005 compared to $0.9 million for the six months ended June 30, 2004.

Research and development expenses, net were $5.2 million for the six months ended June 30, 2005 compared to $1.6 million for the six months ended June 30, 2004, representing an increase of 218.9%.

Sales and marketing expenses were $2.1 million for the six months ended June 30, 2005 compared to $0.5 million for the six months

ended June 30, 2004, representing an increase of 296.2%.

Financial income was $0.1 million for the six months ended June 30, 2005 compared to an expense of $15.0 thousand for the six months ended June 30, 2004, representing an increase of 760.0%.