Digital video offers benefits over analog video in picture quality, bandwidth efficiency, interactivity, flexibility and integration with other content delivered over IP-based networks. Recognizing these benefits, network operators began transitioning to digital technology during the 1990s. Direct-to-home satellite operators, such as DirecTV, Echostar and Sky, launched national networks to deliver hundreds of channels of high-quality digital video programming. Largely in response to the threat posed by satellite operators, cable operators invested significant resources to upgrade their networks to support digital video and two-way, broadband services. More recently, many telecom service providers have either committed to, or initiated, projects to offer digital video services over an IP-based network, referred to as IPTV.

The worldwide transition from analog to digital video is still at an early stage. According to Informa Telecoms & Media, a market research firm, the rate of digital television adoption in North America is expected to increase from 53% of television households in 2005, to 91% in 2010. On a worldwide basis, the rate of digital television adoption is expected to increase from 13% of television households at the end of 2005, to 32% by the end of 2010.

In recent years, demand by consumers for digital content has grown, driven in large part by the growth of the Internet and the availability of affordable broadband access services. The clear shift towards digital entertainment formats is evidenced by the rapid consumer adoption of CDs, DVDs, MP3 players, digital video recorders and digital satellite radio. Digital formats provide consumers with a broader variety of high-quality content that can be accessed at home, at the office or while traveling, and viewed on a wide variety of devices. Network operators are seeking to capitalize on these consumer demand trends by rapidly expanding the amount of digital video programming offered.

Encoders convert analog video content into a digital format and compress and encrypt the traffic for transmission across a network. The Company’s encoders are designed to allow network operators to securely deploy bandwidth-intensive video content, preserve network capacity and deliver a superior picture quality. The Company offers two families of encoders. Its E Series is a field-proven and cost-effective family of encoders supporting a single MPEG-2 video channel.

Decoders receive digital video signals and covert the content back to its original analog format. The Company recently introduced the IRD-2900 Series, a high-density decoder which replaces the 2600/2800 Series. The Company began shipping versions of the IRD-2900 featuring single and dual decoders in the third quarter of 2005. The Company also recently introduced the UID-2900, a product designed to decode IP-based content, allowing cable operators to transition their analog networks to digital through a process known as digital simulcast, among other applications. The Company’s decoders currently support MPEG-2.

The Company offers a range of products designed to enable its customers to more easily deploy and manage their video services. The Company’s NMS-4000 network management system is designed to provide network operators with greater control over their video networks, thereby protecting the quality and availability of their critical services. The Company’s CAS-5000 conditional access system enables small- and medium-sized network operators to control access to, and bill for, video services.

The Company provides a range of ancillary products to assist its customers in the build-out and operation of their digital video networks. The Company also resells third-party modulators used to transport video streams over various networks and third-party HDTV encoders and decoders supporting MPEG-2.

Gross profit increased by 25.2%, from $12.6 million for the nine months ended September 30, 2004 to $15.7 million for the nine months ended September 30, 2005.

Research and development expenses increased by 18.3%, from $6.4 million for the nine months ended September 30, 2004 to $7.6 million for the nine months ended September 30, 2005.

Sales and marketing expenses increased by 23.1%, from $8.1 million for the nine months ended September 30, 2004 to $10.0 million for the nine months ended September 30, 2005.

Financing income (expense) increased from an expense of $8 thousand for the nine months ended September 30, 2004 to income of $274 thousand for the nine months ended September 30, 2005.