##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



---



FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM _______________ TO ______________.

COMMISSION FILE NUMBER: 000-24647



---



TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|                                |  |                    
|------------------------------- |  | -------------------
|DELAWARE                        |  | 77-0328533         
|(STATE OR OTHER JURISDICTION OF |  | (IRS EMPLOYER      
|INCORPORATION OR ORGANIZATION)  |  | IDENTIFICATION NO.)

2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
(408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
THE REGISTRANTS PRINCIPAL EXECUTIVE OFFICES)



---



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 o

As of April 30, 2002, registrant had outstanding 72,732,233 shares of Common Stock.





---

TABLE OF CONTENTS



|                              |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.19                
|EXHIBIT 10.20                



---



##### Table of Contents



SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements of Terayon
Communication Systems, Inc. within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are
subject to the safe harbor created by those sections. The forward-looking
statements include, but are not limited to: statements related to industry
trends and future growth in the markets for cable modem systems; our strategies
for reducing the cost of our products; our product development efforts; the
effect of GAAP accounting pronouncements on our recognition of revenues; our
future research and development; the timing of our introduction of new
products; the timing and extent of deployment of our products by our customers;
and future profitability. We usually use words such as may, will, should,
expect, plan, anticipate, believe, estimate, predict, future,
intend, or certain or the negative of these terms or similar expressions to
identify forward-looking statements. Discussions containing such
forward-looking statements may be found throughout the document. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such forward-looking
statements. We disclaim any obligation to update these forward-looking
statements as a result of subsequent events. The business risks discussed in
Part 1, Item 2 of this Report on Form 10-Q, among other things, should be
considered in evaluating our prospects and future financial performance.




PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

TERAYON COMMUNICATION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                     |  |      |      | 
|---------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001                   |  |      | 3    | 
|Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 (unaudited) |  |      | 4    | 
|Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (unaudited) |  |      | 5    | 
|Notes to Consolidated Financial Statements                                                           |  |      | 6-13 | 

2



---



##### Table of Contents






TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |              |         |  |  | 
|------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------- | ------- | ----------- | --------- | ------------ | ------- |  |  | 
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         | March 31,   |           | December 31,
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         | 2002        |           | 2001        
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         | (unaudited) |           |              |         | 
|                                                                    |                                                                                                |                                                                                                         |                                      | ASSETS  |         |             |           |              |         |  |  | 
|Current assets:                                                     |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    | Cash and cash equivalents                                                                      |                                                                                                         | $                                    | 73,952  |         |             | $         | 100,274      |        
|                                                                    | Short-term investments                                                                         |                                                                                                         |                                      | 236,181 |         |             |           | 233,614      |        
|                                                                    | Accounts receivable, less allowance for doubtful
accounts of $7,813 in 2002 and $7,207 in 2001 |                                                                                                         |                                      | 50,571  |         |             |           | 48,386       |        
|                                                                    | Accounts receivable from related parties                                                       |                                                                                                         |                                      | 5,136   |         |             |           | 4,006        |        
|                                                                    | Other current receivables                                                                      |                                                                                                         |                                      | 11,711  |         |             |           | 7,476        |        
|                                                                    | Inventory                                                                                      |                                                                                                         |                                      | 9,534   |         |             |           | 16,658       |        
|                                                                    | Other current assets                                                                           |                                                                                                         |                                      | 13,385  |         |             |           | 13,462       |        
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                | Total current assets                                                                                    |                                      |         | 400,470 |             |           |              | 423,876 | 
|                                                                    | Property and equipment, net                                                                    |                                                                                                         |                                      | 23,775  |         |             |           | 25,279       |        
|                                                                    | Intangibles and other assets                                                                   |                                                                                                         |                                      | 25,546  |         |             |           | 17,491       |        
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                | Total assets                                                                                            |                                      | $       | 449,791 |             |           |              | 466,646 | 
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                |                                                                                                         | LIABILITIES AND STOCKHOLDERS EQUITY |         |         |             |           |              |         |  | 
|Current liabilities:                                                |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    | Accounts payable                                                                               |                                                                                                         | $                                    | 37,960  |         |             | $         | 42,821       |        
|                                                                    | Accrued payroll and related expenses                                                           |                                                                                                         |                                      | 8,064   |         |             |           | 9,441        |        
|                                                                    | Deferred revenues                                                                              |                                                                                                         |                                      | 2,094   |         |             |           | 4,169        |        
|                                                                    | Accrued warranty                                                                               |                                                                                                         |                                      | 7,723   |         |             |           | 8,368        |        
|                                                                    | Accrued vendor cancellation charges                                                            |                                                                                                         |                                      | 20,651  |         |             |           | 17,291       |        
|                                                                    | Accrued restructuring                                                                          |                                                                                                         |                                      | 7,056   |         |             |           | 8,197        |        
|                                                                    | Other accrued liabilities                                                                      |                                                                                                         |                                      | 8,001   |         |             |           | 14,015       |        
|                                                                    | Current portion of long-term debt                                                              |                                                                                                         |                                      | 1,453   |         |             |           | 3,273        |        
|                                                                    | Current portion of capital lease obligations                                                   |                                                                                                         |                                      | 129     |         |             |           | 126          |        
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                | Total current liabilities                                                                               |                                      |         | 93,131  |             |           |              | 107,701 | 
|Long-term debt                                                      |                                                                                                |                                                                                                         | 1,997                                |         |         |             | 2,467     |             
|Long-term portion of capital lease obligations                      |                                                                                                |                                                                                                         | 199                                  |         |         |             | 233       |             
|Other long-term obligations                                         |                                                                                                |                                                                                                         | 1,827                                |         |         |             | 1,800     |             
|Convertible subordinated notes                                      |                                                                                                |                                                                                                         | 174,141                              |         |         |             | 174,141   |             
|Commitments and contingencies                                       |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|Stockholders equity:                                               |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    | Preferred stock, $0.001 par value:                                                             |                                                                                                         |                                      |         |         |             |           |              |        
|                                                                    |                                                                                                | Authorized shares  5,000,000; Issued and outstanding shares-none                                       |                                      |         |        |             |           |              |        | 
|                                                                    | Common stock, $0.001 par value:                                                                |                                                                                                         |                                      |         |         |             |           |              |        
|                                                                    |                                                                                                | Authorized shares 200,000,000                                                                          |                                      |         |         |             |           |              |         | 
|                                                                    |                                                                                                | Issued72,845,705 in 2002 and 72,201,322 in 2001
Outstanding 72,717,208 in 2002 and 72,073,483 in 2001 |                                      |         | 73      |             |           |              | 73      | 
|Additional paid in capital                                          |                                                                                                |                                                                                                         | 1,077,405                            |         |         |             | 1,074,203 |             
|Accumulated deficit                                                 |                                                                                                |                                                                                                         | (897,084                             | )       |         |             | (892,994  | )           
|Deferred compensation                                               |                                                                                                |                                                                                                         | (263                                 | )       |         |             | (458      | )           
|Treasury stock, at cost; 128,497 shares in 2002 and 127,839 in 2001 |                                                                                                |                                                                                                         | (773                                 | )       |         |             | (768      | )           
|Accumulated other comprehensive (loss) income                       |                                                                                                |                                                                                                         | (862                                 | )       |         |             | 248       |             
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                | Total stockholders equity                                                                              |                                      |         | 178,496 |             |           |              | 180,304 | 
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             
|                                                                    |                                                                                                | Total liabilities and stockholders equity                                                              |                                      | $       | 449,791 |             |           | $            | 466,646 | 
|                                                                    |                                                                                                |                                                                                                         |                                      |         |         |             |           |             

See accompanying notes.

3



---



##### Table of Contents






TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

|                                                              |                                                                 |                                      |         |                    |        |      |           |          |          |  
|------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------ | ------- | ------------------ | ------ | ---- | --------- | -------- | -------- | -
|                                                              |                                                                 |                                      |         | Three Months Ended
|                                                              |                                                                 |                                      |         | March 31,         
|                                                              |                                                                 |                                      |         |                   
|                                                              |                                                                 |                                      |         | 2002               |        | 2001
|                                                              |                                                                 |                                      |         |                    |        |     
|Revenues:                                                     |                                                                 |                                      |         |                    |        |      |           |         
|                                                              | Product revenues                                                |                                      | $       | 51,609             |        |      | $         | 43,889   |         
|                                                              | Related party product revenues                                  |                                      |         | 5,609              |        |      |           | 10,095   |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|                                                              |                                                                 | Total revenues                       |         |                    | 57,218 |      |           |          | 53,984   |  
|                                                              | Cost of goods sold:                                             |                                      |         |                    |        |      |           |          |         
|                                                              | Cost of product revenues                                        |                                      |         | 38,034             |        |      |           | 48,914   |         
|                                                              | Cost of related party product revenues                          |                                      |         | 5,136              |        |      |           | 5,939    |         
|                                                              | Special charges                                                 |                                      |         | (11,443            | )      |      |           |         |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|                                                              |                                                                 | Total cost of goods sold             |         |                    | 31,727 |      |           |          | 54,853   |  
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|Gross profit (loss)                                           |                                                                 |                                      | 25,491  |                    |        |      | (869      | )       
|Operating expenses:                                           |                                                                 |                                      |         |                    |        |      |           |         
|                                                              | Research and development                                        |                                      |         | 16,940             |        |      |           | 22,627   |         
|                                                              | Sales and marketing                                             |                                      |         | 8,853              |        |      |           | 15,483   |         
|                                                              | General and administrative                                      |                                      |         | 3,634              |        |      |           | 7,947    |         
|                                                              | Goodwill amortization                                           |                                      |         |                   |        |      |           | 22,482   |         
|                                                              | Restructuring costs and asset write-offs                        |                                      |         |                   |        |      |           | 574,744  |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|                                                              |                                                                 | Total operating expenses             |         |                    | 29,427 |      |           |          | 643,283  |  
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|Loss from operations                                          |                                                                 |                                      | (3,936  | )                  |        |      | (644,152  | )       
|Interest income                                               |                                                                 |                                      | 2,097   |                    |        |      | 6,734     |         
|Interest expense                                              |                                                                 |                                      | (2,180  | )                  |        |      | (5,744    | )       
|Other expense                                                 |                                                                 |                                      | (65     | )                  |        |      | (438      | )       
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|                                                              | Loss before extraordinary gain and income tax (expense) benefit |                                      |         | (4,084             | )      |      |           | (643,600 | )       
|Income tax (expense) benefit                                  |                                                                 |                                      | (6      | )                  |        |      | 13,906    |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|                                                              |                                                                 | Loss before extraordinary gain       |         |                    | (4,090 | )    |           |          | (629,694 | )
|Extraordinary gain on early retirement of debt                |                                                                 |                                      |        |                    |        |      | 121,494   |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|Net loss                                                      |                                                                 |                                      | ($4,090 | )                  |        |      | ($508,200 | )       
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|Basic and diluted loss per share before
extraordinary gain    |                                                                 |                                      | ($0.06  | )                  |        |      | ($9.33    | )       
|Extraordinary gain on early retirement of debt                |                                                                 |                                      |        |                    |        |      | 1.80      |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|                                                              |                                                                 | Basic and diluted net loss per share |         |                    | ($0.06 | )    |           |          | ($7.53   | )
|                                                              |                                                                 |                                      |         |                    |        |      |           |         
|Shares used in computing basic and diluted
net loss per share |                                                                 |                                      | 72,453  |                    |        |      | 67,488    |         
|                                                              |                                                                 |                                      |         |                    |        |      |           |         

See accompanying notes.

4



---



##### Table of Contents






TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)

|                                                                                          |                                                                                  |   |                    |         |      |   |           |          |  
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | - | ------------------ | ------- | ---- | - | --------- | -------- | -
|                                                                                          |                                                                                  |   | Three Months Ended
|                                                                                          |                                                                                  |   | March 31,         
|                                                                                          |                                                                                  |   |                   
|                                                                                          |                                                                                  |   | 2002               |         | 2001
|                                                                                          |                                                                                  |   |                    |         |     
|Operating activities:                                                                     |                                                                                  |   |                    |         |      |   |           |         
|Net loss                                                                                  |                                                                                  |   | $(4,090            | )       |      |   | $(508,200 | )       
|Adjustments to reconcile net loss to net cash (used in) provided by operating
activities: |                                                                                  |   |                    |         |      |   |           |         
|                                                                                          | Depreciation                                                                     |   |                    | 2,848   |      |   |           | 3,172    |  
|                                                                                          | Write-off and amortization of intangible assets                                  |   |                    |        |      |   |           | 608,798  |  
|                                                                                          | Amortization related to stock options                                            |   |                    | 106     |      |   |           | 1,689    |  
|                                                                                          | Compensation expense for common stock issued in exchange for
consulting services |   |                    | 89      |      |   |           |         |  
|                                                                                          | Extraordinary gain on early retirement of debt                                   |   |                    |        |      |   |           | (121,494 | )
|Changes in operating assets and liabilities:                                              |                                                                                  |   |                    |         |      |   |           |         
|                                                                                          | Accounts receivable                                                              |   |                    | (2,185  | )    |   |           | 11,658   |  
|                                                                                          | Accounts receivable from related parties                                         |   |                    | (1,130  | )    |   |           | 8,799    |  
|                                                                                          | Inventory                                                                        |   |                    | 7,124   |      |   |           | (3,777   | )
|                                                                                          | Other assets                                                                     |   |                    | (12,213 | )    |   |           | 7,964    |  
|                                                                                          | Accounts payable                                                                 |   |                    | (4,861  | )    |   |           | (36,016  | )
|                                                                                          | Accrued payroll and related expenses                                             |   |                    | (1,377  | )    |   |           | (478     | )
|                                                                                          | Deferred revenues                                                                |   |                    | (2,075  | )    |   |           | (1,755   | )
|                                                                                          | Accrued warranty                                                                 |   |                    | (645    | )    |   |           | 997      |  
|                                                                                          | Accrued restructuring charges                                                    |   |                    | (1,141  | )    |   |           |         |  
|                                                                                          | Accrued vendor cancellation charges                                              |   |                    | 3,360   |      |   |           |         |  
|                                                                                          | Deferred taxes                                                                   |   |                    |        |      |   |           | (18,062  | )
|                                                                                          | Other accrued liabilities                                                        |   |                    | (6,014  | )    |   |           | 3,261    |  
|                                                                                          | Other non-current liabilities                                                    |   |                    | 27      |      |   |           | (9,479   | )
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Net cash (used in) provided by operating activities                                       |                                                                                  |   | (22,177            | )       |      |   | (52,923   | )       
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Investing activities:                                                                     |                                                                                  |   |                    |         |      |   |           |         
|Purchases of short-term investments                                                       |                                                                                  |   | (132,595           | )       |      |   | (107,640  | )       
|Proceeds from sales and maturities of short-term investments                              |                                                                                  |   | 129,153            |         |      |   | 189,835   |         
|Purchases of property and equipment                                                       |                                                                                  |   | (1,344             | )       |      |   | (3,184    | )       
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Net cash (used in) provided by investing activities                                       |                                                                                  |   | (4,786             | )       |      |   | 79,011    |         
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Financing activities:                                                                     |                                                                                  |   |                    |         |      |   |           |         
|Principal payments on capital leases                                                      |                                                                                  |   | (31                | )       |      |   | (30       | )       
|Principal payments debt                                                                   |                                                                                  |   | (2,290             | )       |      |   | (8,174    | )       
|Issuance of treasury stock                                                                |                                                                                  |   | (5                 | )       |      |   |          |         
|Exercise of options and warrant to purchase common stock                                  |                                                                                  |   | 1,588              |         |      |   | 279       |         
|Proceeds from issuance of common stock                                                    |                                                                                  |   | 1,614              |         |      |   |          |         
|Principle payment on stockholders note receivable                                        |                                                                                  |   |                   |         |      |   | 3         |         
|Retirement of debt                                                                        |                                                                                  |   |                   |         |      |   | (68,459   | )       
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Net cash (used in) provided by financing activities                                       |                                                                                  |   | 876                |         |      |   | (76,381   | )       
|Effect of exchange rate changes                                                           |                                                                                  |   | (235               | )       |      |   | 12        |         
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Net (decrease) increase in cash and cash equivalents                                      |                                                                                  |   | (26,332            | )       |      |   | (50,281   | )       
|Cash and cash equivalents at beginning of period                                          |                                                                                  |   | 100,274            |         |      |   | 347,015   |         
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         
|Cash and cash equivalents at end of period                                                |                                                                                  | $ | 73,952             |         |      | $ | 296,734   |         
|                                                                                          |                                                                                  |   |                    |         |      |   |           |         

See accompanying notes.

5



---



##### Table of Contents






TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Description of Business

Terayon Communication Systems, Inc. (Company) was incorporated under the
laws of the State of California on January 20, 1993. In July 1998, the Company
reincorporated in the State of Delaware.

The Company develops, markets and sells equipment to cable television
operators, telecom carriers and satellite network operators who use the
Companys products to deliver broadband voice, video and data services to
residential and business subscribers.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial statements at
March 31, 2002 and for the three months ended March 31, 2002 and 2001 have been
included.

Results for the three months ended March 31, 2002 are not necessarily
indicative of results for the entire fiscal year or future periods. These
financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Companys Form
10-K dated April 1, 2002, as filed with the U.S. Securities and Exchange
Commission. The accompanying balance sheet at December 31, 2001 is derived
from audited consolidated financial statements at that date.

Reclassifications

Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.

Use of Estimates

The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries. All intercompany balances
and transactions have been eliminated.

Concentrations of Credit Risk, Customers, Suppliers, and Products

The Company operates in two principal operating segments: Cable Broadband
Access Systems (Cable) and Telecom Access Systems (Telecom). The Company sells
primarily to customers within the cable and telecommunications industries,
including related parties. The Company performs ongoing credit evaluations of
its customers and generally requires no collateral. A relatively small number
of customers

6



---



##### Table of Contents



account for a significant percentage of the Companys revenues and
accounts receivable. The Company expects that the sale of its products to a
limited number of customers and resellers may continue to account for a high
percentage of revenues for the foreseeable future.

Currently, the Company relies on single source suppliers of materials and
labor for the significant majority of its product inventory but is actively
pursuing additional supplier alternatives. As a result, should the Companys
current suppliers not produce and deliver inventory for the Company to sell on
a timely basis, operating results may be adversely impacted.

A majority of the Companys revenues have been attributable to sales of
its Cable products, primarily modems and headend equipment. These products are
expected to account for a significant part of the Companys revenues for the
foreseeable future. As a result, a decline in demand for or failure to achieve
broad market acceptance of the Companys Cable products would adversely affect
operating results.

In addition, market acceptance of the Companys products may be affected
by the emergence and evolution of industry standards. While the Company expects
its products to become compliant with industry standards, its inability to do
so may adversely affect operating results.

The Company invests its excess cash in debt instruments of governmental
agencies, and corporations with credit ratings of AA/AA- or better or A1/P1 or
better, respectively. The Company has established guidelines relative to
diversification and maturities that attempt to maintain safety and liquidity.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.

Revenue Recognition

The Company sells its products directly to broadband access service
providers, system resellers and distributors and recognizes revenue upon
shipment to the customer when title is transferred. Revenues related to product
sales are generally recognized when: (1) persuasive evidence that an
arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the sellers price to the buyer is fixed or determinable, and (4)
collectibility is reasonably assured. The Companys existing agreements with
its system resellers and distributors do not contain price protection
provisions and do not grant return rights beyond those provided by the
Companys standard warranty.

Warranty Reserves

The Company provides a standard warranty for most of its products,
generally lasting one year from the date of purchase. The Company provides for
the estimated cost of product warranties at the time revenue is recognized.
The Companys warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Reserve estimates are based on historical experience and expectation
of future conditions.

Cash Equivalents and Short-Term Investments

The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with an original maturity at the time of purchase of over three months are
classified as short-term investments regardless of maturity date as all
investments are classified as available-for-sale and can be readily liquidated
to meet current operational needs.

The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Companys short-term
investments, which consist primarily of commercial paper, U.S. government and
U.S. government agency obligations and fixed income corporate securities, are
classified as available-for- sale and are carried at amortized cost which
approximates fair market value. Realized gains and losses and declines in value
judged to be other-than-

7



---



##### Table of Contents



temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. The Company had no material investments in equity securities at either
March 31, 2002 or December 31, 2001.

Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market.
The components of inventory are as follows (in thousands):

|                |  |           |       |              |  |   |        | 
|--------------- |  | --------- | ----- | ------------ |  | - | ------ | 
|                |  | March 31, |       | December 31,
|                |  | 2002      |       | 2001        
|                |  |           |       |             
|Finished goods  |  | $         | 3,216 |              |  | $ | 6,433  | 
|Work-in-process |  |           | 891   |              |  |   | 236    | 
|Raw materials   |  |           | 5,427 |              |  |   | 9,989  | 
|                |  |           |       |              |  |   |        | 
|                |  | $         | 9,534 |              |  | $ | 16,658 | 
|                |  |           |       |              |  |   |        | 

Cost of goods sold for the three months ended March 31, 2002 included a
reversal of approximately $11.4 million in special charges taken in 2001 for
vendor cancellation charges and inventory previously provided for obsolesence.
The Company was able to reverse the provision as it was able to sell inventory
originally considered to be excess. In addition, the Company was able to
negotiate downward certain vendor cancellation claims to terms more favorable
to the Company.

Net Loss Per Share

Basic and diluted net loss per share were computed using the weighted
average number of common shares outstanding. Options to purchase 19,634,733 and
20,007,686 shares of common stock were outstanding at March 31, 2002 and
December 31, 2001, respectively. Warrants to purchase 2,408,300 shares of
common stock were outstanding at March 31, 2002 and December 31, 2001. Neither
the options or warrants were included in the computation of diluted net loss
per share, since the effect would be antidilutive.

Comprehensive Net Income (Loss)

Accumulated other comprehensive loss presented in the accompanying
consolidated balance sheets consists of net unrealized gains or losses on
short-term investments and accumulated net foreign currency translation gains
or losses.

The following are the components of comprehensive income (loss):

|                         |                                                                     |  |           |      |           |  |           |     | 
|------------------------ | ------------------------------------------------------------------- |  | --------- | ---- | --------- |  | --------- | --- | 
|                         |                                                                     |  | March 31, |      | March 31,
|                         |                                                                     |  | 2002      |      | 2001     
|                         |                                                                     |  |           |      |          
|Net loss                 |                                                                     |  | ($4,090   | )    |           |  | ($508,200 | )  
|                         | Cumulative translation adjustments                                  |  |           | (235 | )         |  |           | 12  | 
|                         | Change in unrealized gain (loss) on available-
for-sale investments |  |           | (875 | )         |  |           | 382 | 
|                         |                                                                     |  |           |      |           |  |           |    
|Total comprehensive loss |                                                                     |  | ($5,200   | )    |           |  | ($507,806 | )  
|                         |                                                                     |  |           |      |           |  |           |    

8



---



##### Table of Contents



Impact of Recently Issued Accounting Standards

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets (SFAS 144). SFAS 144 supercedes
SFAS 121, Accounting for the Impairment of Long-lived Assets and Assets to be
Disposed Of and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of Operations
-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transaction. SFAS
144 also amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of SFAS 144 were
adopted by the Company effective January 1, 2002 and did have a material effect
on its financial position or results of operations.

In June 2001, the Financial Accounting Standards Board issued SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets arising from business combinations completed after June 30,
2001. SFAS 142 prohibits the amortization of goodwill and intangible assets
with indefinite useful lives. SFAS 142 requires that these assets be reviewed
for impairment at least annually. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. Additionally, SFAS
142 requires that goodwill included in the carrying value of equity method
investments no longer be amortized.

The Company adopted SFAS 142 on January 1, 2002. The Company reclassified
identifiable intangible assets with indefinite lives, as defined by SFAS 142,
to goodwill at the date of adoption. The Company tests goodwill for impairment
using the two-step process prescribed in SFAS 142. The first step is a screen
for potential impairment, while the second step measures the amount of the
impairment, if any. The Company performed the first step of the required
impairment tests of goodwill and indefinite lived intangible assets as of March
31, 2002 with no resulting impairment charge.

The following pro forma information reflects the impact on net loss and
net loss per share assuming the adoption of SFAS 142 had occurred on January 1,
2001:

|                                      |                                                                                        |                              |                    |        |                    |        |                          |        |        |          |  
|------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------- | ------------------ | ------ | ------------------ | ------ | ------------------------ | ------ | ------ | -------- | -
|                                      |                                                                                        |                              |                    |        | Three Months Ended
|                                      |                                                                                        |                              |                    |        | March 31          
|                                      |                                                                                        |                              |                    |        |                   
|                                      |                                                                                        |                              |                    |        | 2002               |        | 2001
        (Pro forma)
|                                      |                                                                                        |                              |                    |        |                    |        |                         
|                                      |                                                                                        |                              |                    |        |                    |        |                          |        |       
|Reported net loss                     |                                                                                        |                              | ($4,090            | )      |                    |        | ($508,200                | )     
|                                      | Amortization of goodwill and intangible assets
with indefinite lives                   |                              |                    |       |                    |        |                          | 26,020 |       
|                                      |                                                                                        |                              |                    |        |                    |        |                          |       
|                                      |                                                                                        |                              | Pro Forma net loss |        |                    | (4,090 | )                        |        |        | (482,181 | )
|                                      |                                                                                        |                              |                    |        |                    |        |                          |       
|Basic and diluted net loss per share: |                                                                                        |                              |                    |        |                    |        |                          |       
|                                      | Reported net loss                                                                      |                              |                    | ($0.06 | )                  |        |                          | ($7.53 | )     
|                                      | Income related to amortization of goodwill and
intangible assets with indefinite lives |                              |                    |       |                    |        | $                        | 0.39   |       
|                                      |                                                                                        |                              |                    |        |                    |        |                          |       
|                                      |                                                                                        | Pro forma net loss per share |                    |        | ($0.06             | )      |                          |        | ($7.14 | )       
|                                      |                                                                                        |                              |                    |        |                    |        |                          |       

9



---



##### Table of Contents



2. Commitments and Purchase Obligations

On April 1, 2002, the Company entered into sublease agreement to lease a
facility located in Santa Clara, California. The facility will become the
Companys new headquarters and encompasses approximately 141,000 square feet.
The sublease agreement expires on October 31, 2009. The Company will be
required to make monthly rental payments that escalate to predetermined amounts
on an annual basis. The Company also leases its other facilities and certain
equipment under operating leases. These operating leases expire in 2002 and
2003.

The Company has purchase obligations to certain of its suppliers that
support the Companys ability to manufacture its products. The obligations
require the Company to purchase minimum quantities of the suppliers products
at a specified price. During fiscal year 2001, the Company recorded special
charges of $33.5 million relating to vendor cancellation fees and inventory
obsolescence. During the three months ended March 31, 2002, special charges
were reduced by $11.4 million as the Company was able to reverse the provision
as it was able to sell inventory originally considered to be excess. As of
March 31, 2002, the Company had $75.7 million of purchase obligations, of which
$20.7 million is included on the balance sheet as accrued vendor cancellation
charges. The remaining obligations are expected to become payable at various
times through mid 2003.

3. Contingencies

Beginning in April 2000, several plaintiffs filed lawsuits against the
Company and certain of its officers and directors in federal court. The
plaintiff in the first of these lawsuits purported to represent a class whose
members purchased the Companys securities between February 2, 2000 and April
11, 2000. The complaint alleged that the defendants had violated the federal
securities laws by issuing materially false and misleading statements and
failing to disclose material information regarding the Companys technology.
The allegations in the other lawsuits were substantially the same and, on
August 24, 2000, all of these lawsuits were consolidated in the United States
District Court, Northern District of California. The court hearing the
consolidated action has appointed lead plaintiffs and lead plaintiffs counsel
pursuant to the Private Securities Litigation Reform Act.

On September 21, 2000, the lead plaintiffs filed a consolidated class
action complaint containing factual allegations nearly identical to those in
the original lawsuits. The consolidated class action complaint, however,
alleged claims on behalf of a class whose members purchased or otherwise
acquired our securities between November 15, 1999 and April 11, 2000. On
October 30, 2000, defendants moved to dismiss the consolidated class action
complaint. On March 14, 2001, after defendants motion had been fully briefed
and argued, the court issued an order granting in part defendants motion and
giving plaintiffs leave to file an amended complaint. On April 13, 2001,
plaintiffs filed their first amended consolidated class action complaint. On
June 15, 2001, defendants moved to dismiss this new complaint and oral argument
on the motion occurred on December 17, 2001. On March 29, 2002, the court
denied the defendants motion to dismiss. The parties are now beginning the
discovery process.

The lawsuit seeks an unspecified amount of damages, in addition to other
forms of relief. The Company considers the lawsuits to be without merit and
intends to defend vigorously against these allegations. However, the litigation
could prove to be costly and time consuming to defend, and there can be no
assurances about the eventual outcome.

On October 16, 2000, a lawsuit was filed against the Company and the
individual defendants (Zaki Rakib, Selim Rakib and Raymond Fritz) in the
superior court of San Luis Obispo County, California. This lawsuit is titled
Bertram v. Terayon Communications Systems, Inc., (Bertram). The Bertram
complaint contains factual allegations similar to those alleged in the federal
securities class action lawsuit. The complaint asserts causes of action for
unlawful business practices, unfair and fraudulent business practices, and
false and misleading advertising. Plaintiffs purport to bring the action on
behalf of themselves and as representatives of all persons or entities in the
State of California and such other persons or entities outside California that
have been and are adversely affected by defendants activity, and as the Court
shall determine is not inconsistent with the exercise of the Courts
jurisdiction. Plaintiffs seek equitable and

10



---



##### Table of Contents



injunctive relief. Defendants removed the Bertram case to the United
States District Court, Central District of California and, on January 19, 2001,
filed a motion to dismiss the complaint. A hearing on defendants motion was
held March 26, 2001 and the court granted Defendants motion to dismiss the
action and denied Plaintiffs motion requesting remand. On April 5, 2001,
Defendants moved for an order requiring further proceedings, if any to take
place in the Northern District of California. Plaintiffs did not oppose this
motion and eventually entered into a stipulation to go forward in the Northern
District. On July 9, 2001, a status conference was held in this case before
Judge Patel. Plaintiffs did not appear for the conference, and the court
requested that defendants submit an order dismissing the Bertram action with
prejudice, which the defendants have submitted to the court. The Company
believes that these allegations, as with the allegations in the federal
securities case, are without merit and intends to contest the matter
vigorously.

The Company has learned that, on May 7, 2002, a shareholder filed a
derivative lawsuit on behalf of Terayon against its current directors, one
former director, and two former senior officers of the Company. This lawsuit
is titled Campbell vs. Rakib, et al., and is pending in the California Superior
Court, Santa Clara County. The Company is a nominal defendant in this lawsuit,
which alleges claims relating to essentially the same purportedly misleading
statements that are at issue in the pending securities class action. In that
litigation, the Company disputes that it made any misleading statements. The
derivative complaint also alleges claims relating to stock sales by certain of
the director and officer defendants.

The Company believes that there are numerous deficiencies in this lawsuit.

4. Operating Segment Information

The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM allocates resources to each
segment based on their business prospects, competitive factors, revenues and
operating results.

The Company views its business as having two principal operating segments:
Cable Broadband Access Systems (Cable) and Telecom Carrier Access Systems
(Telecom). The Cable segment consists primarily of its TeraComm Systems,
CherryPicker Digital Video Management Systems, and Multigate Telephony and Data
Access Systems that are sold primarily to cable operators for the deployment of
data, video and voice services over the existing cable infrastructure. The
Telecom segment consists primarily of MiniPlex DSL Systems, IPTL Converged
Voice and Data Service System and MainSail products, which are sold to
providers of broadband services for the deployment of voice and data services
over the existing copper wire infrastructure.

11



---



##### Table of Contents



Information on reportable segments for the three months ended March 31,
2002 and 2001 is as follows (in thousands):

|                                         |                         |                      |              |        |                    |         |          |        |         |         | 
|---------------------------------------- | ----------------------- | -------------------- | ------------ | ------ | ------------------ | ------- | -------- | ------ | ------- | ------- | 
|                                         |                         |                      |              |        | Three Months Ended
|                                         |                         |                      |              |        | March 31,         
|                                         |                         |                      |              |        |                   
|                                         |                         |                      |              |        | 2002               |         | 2001    
|                                         |                         |                      |              |        |                    |         |         
|Cable Broadband Access Segment:          |                         |                      |              |        |                    |         |          |       
|Revenues                                 |                         | $                    | 54,625       |        |                    | $       | 44,366   |       
|Operating loss                           |                         |                      | (657         | )      |                    |         | (385,197 | )     
|Total assets                             |                         |                      | 442,223      |        |                    |         | 637,654  |       
|Telecom Broadband Access Segment:        |                         |                      |              |        |                    |         |          |       
|Revenues                                 |                         |                      | 2,593        |        |                    |         | 9,618    |       
|Operating loss                           |                         |                      | (3,279       | )      |                    |         | (258,955 | )     
|Total assets                             |                         |                      | 7,568        |        |                    |         | 17,905   |       
|Operating loss:                          |                         |                      |              |        |                    |         |          |       
|Operating loss by reportable segments    |                         |                      | (3,936       | )      |                    |         | (644,152 | )     
|Unallocated amounts:                     |                         |                      |              |        |                    |         |          |       
|Interest and other income (expense), net |                         |                      | (148         | )      |                    |         | 552      |       
|Income tax benefit (expense)             |                         |                      | (6           | )      |                    |         | 13,906   |       
|Extraordinary gain                       |                         |                      |             |        |                    |         | 121,494  |       
|                                         |                         |                      |              |        |                    |         |          |       
|Net loss                                 |                         | $                    | (4,090       | )      |                    | $       | (508,200 | )     
|                                         |                         |                      |              |        |                    |         |          |       
|Geographic areas:                        |                         |                      |              |        |                    |         |          |       
|Revenues:                                |                         |                      |              |        |                    |         |          |       
|                                         | United States           |                      | $            | 9,645  |                    |         | $        | 19,585 |        
|                                         | Canada                  |                      |              | 7,112  |                    |         |          | 11,243 |        
|                                         | Europe and Israel       |                      |              | 8,038  |                    |         |          | 9,194  |        
|                                         | Asia                    |                      |              | 31,986 |                    |         |          | 13,920 |        
|                                         | South America           |                      |              | 436    |                    |         |          | 42     |        
|                                         |                         |                      |              |        |                    |         |          |       
|                                         |                         | Total                |              | $      | 57,218             |         |          | $      | 53,984  |        
|                                         |                         |                      |              |        |                    |         |          |       
|Long-lived assets:                       |                         |                      |              |        |                    |         |          |       
|                                         | United States           |                      | $            | 43,721 |                    |         | $        | 54,848 |        
|                                         | Canada                  |                      |              | 225    |                    |         |          |       |        
|                                         | Europe and Israel       |                      |              | 3,991  |                    |         |          | 8,324  |        
|                                         | Asia                    |                      |              | 222    |                    |         |          | 183    |        
|                                         | South America           |                      |              | 1,162  |                    |         |          | 6,971  |        
|                                         |                         |                      |              |        |                    |         |          |       
|                                         | Total Long-lived assets |                      |              | 49,321 |                    |         |          | 70,328 |        
|                                         |                         |                      |              |        |                    |         |          |       
|                                         |                         | Total current assets |              |        | 400,470            |         |          |        | 585,231 |        
|                                         |                         |                      | Total Assets |        | $                  | 449,791 |          |        | $       | 655,559 | 
|                                         |                         |                      |              |        |                    |         |          |       

Three customers accounted for 10% or more of total revenues (36%, 10% and
10%) for the three months ended March 31, 2002. Two customers accounted for 10%
or more of total revenues (13% and 13%) for the three months ended March 31,
2001. No other customer accounted for more than 10% of revenues during these
periods.

5. Restructuring Charges and Asset Write-offs

During 2001, the Companys Board of Directors approved a restructuring
plan to streamline the Companys organizational structure worldwide. The
Company incurred restructuring charges in the amount of $2.9 million in the
first quarter of 2001 and $12.7 million in fiscal year 2001. Of the total

12



---



##### Table of Contents



restructuring charges recorded during fiscal year 2001, $3.2 million
related to employee termination costs. At March 31, 2002, restructuring
charges of $7.1 million remain accrued, primarily related to excess facility
costs and employee terminations. The Company anticipates utilizing the
remaining restructuring accrual, which relates to servicing operating lease
payments or negotiated buyout of operating lease commitments, through 2005.
Remaining employee termination costs of $1.1 million are expected to be paid
during fiscal 2002. The Company expects reductions in overall operating
expenses as a result of these headcount reductions.

The Company incurred an asset write-off of $1.6 million in the year ended
December 31, 2001. The $1.6 million write-off related to fixed assets acquired
from ANE that were determined to have no remaining useful life. There were no
asset write-offs in the three months ended March 31, 2002.

Restructuring costs are summarized below (in millions):

|                             |  |              |      |                     |  |               |      |   |  |   |      |  
|---------------------------- |  | ------------ | ---- | ------------------- |  | ------------- | ---- | - |  | - | ---- | -
|                             |  |              |      |                     |  | Excess Leased |      |   |  |  
|                             |  | Involuntary  |      | Facilities and      |  |               |      |  
|                             |  | Terminations |      | Cancelled Contracts |  | Total        
|                             |  |              |      |                     |  |              
|Balance at December 31, 2001 |  | $            | 1.2  |                     |  | $             | 7.0  |   |  | $ | 8.2  |  
|Additions                    |  |              |     |                     |  |               |     |   |  |   |     |  
|Cash Payments                |  |              | (0.1 | )                   |  |               | (1.0 | ) |  |   | (1.1 | )
|                             |  |              |      |                     |  |               |      |   |  |   |      |  
|Balance at March 31, 2002    |  | $            | 1.1  |                     |  | $             | 6.0  |   |  | $ | 7.1  |  
|                             |  |              |      |                     |  |               |      |   |  |   |      |  

In March 2001, the Company evaluated the carrying value of certain
long-lived assets and acquired intangibles, consisting primarily of goodwill
recorded on its balance sheet. Pursuant to accounting rules, the majority of
the goodwill was recorded based on stock prices at the time acquisition
agreements were executed and announced. Goodwill and other long-lived assets
are reviewed for impairment whenever events such as product discontinuance,
plant closures, product dispositions or other changes in circumstances indicate
that the carrying amount may not be recoverable. When such events occur, the
Company compares the carrying amount of the assets to undiscounted expected
future cash flows. If this comparison indicates that there is an impairment,
the amount of the impairment is based on the fair value of the assets,
typically calculated using discounted expected future cash flows. The discount
rate applied to these cash flows is based on our weighted average cost of
capital, which represents the blended costs of debt and equity.

Downturns in the broadband services and telecommunications markets created
unique circumstances with regard to the assessment of goodwill and other
intangible assets for recoverability. As a result of the Companys decision to
suspend certain product lines and product development efforts during the first
quarter of 2001, intangible assets totaling $165.8 million relating to certain
acquisitions were deemed to be impaired with no future value and were
written-off. Further, the aforementioned downturns in the principal markets in
which the Company continues to operate, have negatively impacted the forecasted
revenues and cash flows from certain other companies acquired during fiscal
1999 and 2000. In accordance with the Companys policy, the comparison of the
discounted expected future cash flows to the carrying amount of the related
intangible assets resulted in a write-down of these assets related to both our
Cable and Telecom segments of $406.0 million during the first quarter 2001.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto.

13



---



##### Table of Contents



Overview

We develop, market and sell equipment to cable television operators,
telecom carriers and satellite network operators, who use our products to
deliver broadband voice, video and data services to residential and business
subscribers. We strive to deliver the most innovative broadband data, video and
voice solutions that enable service providers to accelerate the deployment of
revenue-generating services today and tomorrow.

We sell our products to cable operators and other providers of broadband
services through direct sales forces in North America, South America, Europe
and Asia. We also distribute our products through resellers and system
integrators. We are structured around, and our sales are derived from, the
following operating segments: Cable Broadband Access Systems (Cable) and
Telecom Carrier Systems (Telecom). The products sold in Cable consists
primarily of our TeraComm System products which are based on our proprietary
S-CDMA technology, our CherryPicker digital video management system and the
Multigate telephony and data access system, which are sold primarily to cable
operators for the deployment of data, video and voice services over the
existing cable infrastructure. The products sold in Telecom consists primarily
of our MiniPlex DSL Systems, our IPTL Converged Voice and Data Service System
and our MainSail products, which are sold to broadband service providers for
the deployment of voice and data services over the existing copper wire
infrastructure. We sell directly to providers of broadband access services and
to distributors and resellers throughout the world.

We sustained a net loss of $4.1 million for the three months ended March
31, 2002. We had an accumulated deficit of $897.1 million as of March 31, 2002.
Our operating expenses are based in part on our expectations of future sales,
and we expect that a significant portion of our expenses will be committed in
advance of sales. We expect to continue to increase our expenditures in
technical development and sales and marketing as we engage in activities
related to product enhancement and increasing market penetration. Additionally,
we expect to increase our capital expenditures and other operating expenses in
order to support our operations. We anticipate that we will spend approximately
$12 million to $15 million on capital expenditures and approximately $70
million to $80 million on research and development during the year ending
December 31, 2002. Anticipated capital expenditures consist of purchases of
additional test equipment to support higher levels of production and computer
hardware, furniture and leasehold improvements for our facilities, expanded
geographical implementation of an enterprise resource planning system and
software and equipment for newly hired employees. As a result of these
anticipated increased operating expenses, we expect to continue to incur losses
for the foreseeable future.

Critical Accounting Policies

We consider certain accounting policies related to revenue recognition,
bad debt reserves, inventory valuation, impairment of long-lived assets,
warranty returns and contingencies to be critical policies due to the
estimation processes involved in each.

Use of Estimates.The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in the United States
requires that we make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.

Revenue Recognition.We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements(SAB
101), as amended by SAB 101A and 101B. SAB 101 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred or services rendered; (3)
the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (4) is based on managements
judgments regarding the collectibility of the selling price. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognized for any reporting period could be
adversely affected.

14



---



##### Table of Contents



Bad Debt Reserves. We evaluate our trade receivables based upon a
combination of factors. When we become aware of a customers inability to pay,
such as in the case of bankruptcy or a decline in the customers operating
results or financial position, we record a specific reserve for bad debt to
reduce the related receivable to an amount we reasonably believe is
collectible. We also record reserves for bad debt for customers based upon
other factors including the length of time the receivables are past due and
historical experience. If circumstances related to a specific customer change,
our estimates of the recoverability of receivables could be further reduced.

Inventory Valuation.We perform a detailed assessment of inventory at
each balance sheet date which includes a review of, among other factors, demand
requirements, product lifecycle and product development plans. Based on this
analysis, we record adjustments, when appropriate, to reflect inventory at net
realizable value.

We have adjusted our reserves significantly in recent periods due to
changes in strategic direction, such as discontinuances of product lines as
well as fluctuations in market conditions due to changes in demand
requirements. If future demand is less favorable than we have projected,
additional inventory write-downs may be required.

Impairment of Long-lived assets.Our long-lived assets include long-term
investments, property and equipment goodwill and other intangible assets. At
March 31, 2002, we had $4.5 million of long-term investments and $3.8 million
of goodwill and other intangible assets. Our estimate of the fair value of the
long-term investments is dependent on the performance of the companies in which
we have invested, as well as the volatility inherent in the external markets
for these investments. If the forecasts are not met, we may have to record
additional impairment charges.

In assessing the recoverability of our property and equipment and goodwill
and other intangible assets, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or their related assumptions change in
the future, we may be required to record additional impairment charges for
these assets. During the year ended December 31, 2001, we recorded impairment
charges of $572.8 million. On January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142) which had no material effect on our financial position or results of
operations. We are required to analyze our remaining indefinite lived assets,
including goodwill for impairment during the first six months of 2002, and on
a periodic basis thereafter.

Warranty Reserves.We provide a standard warranty for most of our
products, generally lasting one year from the date of purchase. We provide for
the estimated cost of product warranties at the time revenue is recognized.
Our warranty obligations are affected by product failure rates, material usage
and service delivery costs incurred in correcting a product failure. Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. Should actual product failure
rates, material usage or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be required, resulting in
decreased gross profits.

Contingencies.We are subject to proceedings, lawsuits and other claims
related to labor, acquisition and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies are made after careful analysis of
each individual issue. The required reserves may change in the future due to
new developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters, resulting in higher net
loss.

Results of Operations

Three Months Ended March 31, 2002 and 2001

Revenues. We sell our products directly to broadband service providers,
and to a lesser extent, resellers and integrators. Revenues related to product
sales are generally recognized when: (1) persuasive

15



---



##### Table of Contents



evidence that an arrangement exists, (2) delivery has occurred or services
rendered, (3) the selling price is fixed or determinable, and (4) collectiblity
is reasonably assured. A provision is made for estimated product returns as
product shipments are made. Our existing agreements typically do not contain
price protection provisions and generally do not grant return rights beyond
those provided by our standard warranty.

Revenues consist primarily of sales of products to new and existing
customers providing broadband services. Our revenues increased 6.0% to $57.2
million for the three months ended March 31, 2002 from $54.0 million in the
three months ended March 31, 2001. Revenues from Cable amounted to $54.6
million in 2002, up 23.1% from $44.4 million in 2001. The increase in revenues
in 2002 was largely attributable to increased modem shipments and, to a lesser
extent, shipments of CMTS units.

The intensely competitive nature of the market for broadband products has
resulted in significant price erosion over time. We have experienced and
expect to continue to experience downward pressure on our unit Average Selling
Prices (ASPs). A key component of our strategy is to decrease the cost of
manufacturing our products to offset the decline in ASPs. We intend to
continue to implement cost reduction efforts, including design changes and
manufacturing efficiencies.

Revenues from Telecom were $2.6 million in 2002, down 73.0% from $9.6
million in 2001. This significant decrease reflects lower capital expenditures
in the telecom industry due to weak demand and over-capacity in existing
networks.

Cost of Goods Sold. Cost of goods sold consists of direct product costs as
well as the cost of our manufacturing operations group. The cost of the
manufacturing operations group includes assembly, test and quality assurance
for products, warranty costs and associated costs of personnel and equipment.
In the three months ended March 31, 2002, cost of goods sold decreased by 42.1%
to $31.7 million compared to $54.9 million in 2001. Cost of goods sold for the
three months ended March 31, 2002 included a reversal of approximately $11.4
million in special charges taken in 2001 for vendor cancellation charges and
inventory previously provided for obsolescence. We were able to reverse the
provision as we were able to sell inventory originally considered to be excess.
In addition, we were able to negotiate downward certain vendor cancellation
claims to terms more favorable to the Company. Cost of goods sold for the
three months ended March 31, 2001 included approximately $11.8 million of
amortization of acquired intangible assets. There was no amortization of
acquired intangible assets in 2002. Excluding the reversal of special charges
in 2002 and the amortization of acquired intangible assets in 2001, our cost of
goods sold remained relatively flat in dollar terms, but decreased as a
percentage of sales due to product cost reductions.

Gross Profit. We achieved a gross profit of $25.5 million or 44.6% of
sales for the three months ended March 31, 2002 compared to a gross loss of
$0.9 million in 2001. The increase in gross profit for the first quarter of
2002 is primarily related to the reversal of special charges in 2002, the
reductions in the cost of manufacturing our products, and increased revenues.
In addition, there was no amortization of acquired intangible assets in the
quarter ended March 31, 2002. Excluding the reversal of special charges, gross
profit for the first quarter of 2002 was 24.6% of sales. During 2002, we
anticipate further decreases in our ASPs and continued pressure on our margins,
and we expect to see decreasing margins in 2002 unless and until we can produce
lower cost products. These ASP decreases, without a corresponding decrease in
our product costs, will likely have an adverse impact on our operating results
in 2002.

Research and Development. Research and development expenses consist
primarily of personnel costs, as well as prototype materials, equipment and
supplies required to develop and to enhance our products. Research and
development expenses decreased 25.1% to $16.9 million in the three months ended
March 31, 2002 from $22.6 million in 2001. The decrease in research and
development expenses was primarily related to reductions in force during 2001
as well amortization of acquired intangible assets, which amounted to $2.1
million in 2001. There was no amortization in 2002. We intend to continue our
investment in research and development, and as a result, we anticipate higher
research and development expenditures in the quarter ending June 30, 2002.

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales personnel, marketing and support personnel,
and costs related to trade shows, consulting and

16



---



##### Table of Contents



travel. Sales and marketing expenses decreased to $8.9 million in the
three months ended March 31, 2002 from $15.5 million in the three months ended
March 31, 2001, a decrease of 42.8%. The decrease in sales and marketing
expenses was due to lower headcount due to reductions in force during 2001 and
amortization of acquired intangible assets of $1.3 million in 2001. There was
no amortization in 2002. We expect sales and marketing expenses to increase
in the second quarter of 2002 as we have added sales personnel in the first
quarter of 2002.

General and Administrative. General and administrative expenses primarily
consist of salary and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General and
administrative expenses decreased to $3.6 million for the three months ended
March 31, 2002, down 54.3% from $7.9 million in the three months ended March
31, 2001. General and administrative expenses in 2001 include $1.3 million in
amortization of acquired intangible assets. There was no amortization in 2002.
In addition, general and administrative expenses decreased due to lower
headcount and reduced legal, information technology and accounting fees in
2002. We expect general and administrative expenses to increase in the second
quarter of 2002.

Goodwill Amortization. During the three months ended March 31, 2002, the
Company adopted SFAS 142, Goodwill and Other Intangible Assets. Statement 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives and requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized
over their estimated useful lives. As of March 31, 2002, the Company had $3.8
million in goodwill and intangible assets which have an indefinite useful life
and thus no amortization expense was recorded during the three months ended
March 31, 2002. Goodwill arising from acquisitions accounted for $22.5 million
in amortization in the three months ended March 31, 2001.

Restructuring Costs and Asset Write-offs. In March 2001, the Company
evaluated the carrying value of certain long-lived assets and acquired
intangibles, consisting primarily of goodwill recorded on its balance sheet.
Pursuant to accounting rules, the majority of the goodwill was recorded based
on stock prices at the time acquisition agreements were executed and announced.
Goodwill and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. When such events occur, the Company compares the carrying amount
of the assets to undiscounted expected future cash flows. If this comparison
indicates that there is an impairment, the amount of the impairment is based on
the fair value of the assets, typically calculated using discounted expected
future cash flows. The discount rate applied to these cash flows is based on
our weighted average cost of capital, which represents the blended costs of
debt and equity.

Downturns in the broadband services and telecommunications markets created
unique circumstances with regard to the assessment of goodwill and other
intangible assets for recoverability. As a result of the Companys decision
to suspend certain product lines and product development efforts during the
first quarter of 2001, intangible assets totaling $165.8 million relating to
certain acquisitions were deemed to be impaired with no future value and were
written off. Further, the aforementioned downturns in the principal markets in
which the Company continues to operate, have negatively impacted the forecasted
revenues and cash flows from certain other companies acquired during fiscal
1999 and 2000. In accordance with the Companys policy, the comparison of the
discounted expected future cash flows to the carrying amount of the related
intangible assets resulted in a write-down of these assets related to both our
Cable and Telecom segments of $406.0 million during the first quarter 2001.

We incurred restructuring charges in the amount of $2.9 million in the
first quarter of 2001 and $12.7 million in fiscal year 2001. Of the total
restructuring charges recorded during fiscal year 2001, $3.2 million related to
employee termination costs. During the first quarter of 2002, we made cash
payments of $1.2 million against the restructuring accrual. At March 31, 2002,
restructuring charges of $7.1 million remain accrued, primarily related to
excess facility costs and employee terminations. We anticipate utilizing the
remaining restructuring accrual, which relates to servicing operating lease
payments or negotiated buyout of operating lease commitments, through 2005.
Remaining employee termination costs of $1.1 million are expected to be paid
during fiscal 2002.

17



---



##### Table of Contents



Interest Income and Expense. Interest income was $2.1 million for the
three months ended March 31, 2002 compared to $6.7 million in 2001, a decrease
of 68.9%. The decrease in interest income is due to lower invested cash
balances as well as lower interest rates. Interest expense, which relates
primarily to interest on our Convertible Subordinated Notes due in 2007
(Notes), was $2.2 million for the three months ended March 31, 2002 compared to
$5.7 million in 2001, a decrease of 61.4%. The decrease in interest expense was
due to the repurchase of $325.9 million of the Notes in 2001.

Income Taxes. During the three months ended March 31, 2002, we recorded a
provision for income taxes of $6,000. During the three months ended March 31,
2001 we had a benefit of $13.9 million which consisted of a reduction of
deferred tax liabilities related to the Combox and Ultracom acquisitions and a
$485,000 provision for foreign taxes.

Extraordinary gain on early retirement of debt. During the first quarter
2001, we repurchased approximately $195.6 million of our Convertible
Subordinated Notes for $68.5 million in cash, resulting in an extraordinary
gain of approximately $121.5 million, net of related unamortized issue costs.

Litigation

Beginning in April 2000, several plaintiffs filed lawsuits against us and
certain of our officers and directors in federal court. The plaintiff in the
first of these lawsuits purported to represent a class whose members purchased
our securities between February 2, 2000 and April 11, 2000. The complaint
alleged that the defendants had violated the federal securities laws by issuing
materially false and misleading statements and failing to disclose material
information regarding our technology. The allegations in the other lawsuits
were substantially the same and, on August 24, 2000, all of these lawsuits were
consolidated in the United States District Court, Northern District of
California. The consolidated lawsuit is named In re Terayon Communication
Systems, Inc. Securities Litigation, Case No. C 00-1967-MHP. The court hearing
the consolidated action has appointed lead plaintiffs and lead plaintiffs
counsel pursuant to the Private Securities Litigation Reform Act.

On September 21, 2000, the lead plaintiffs filed a consolidated class
action complaint containing factual allegations nearly identical to those in
the original lawsuits. The consolidated class action complaint, however,
alleged claims on behalf of a class whose members purchased or otherwise
acquired our securities between November 15, 1999 and April 11, 2000. On
October 30, 2000, defendants moved to dismiss the consolidated class action
complaint. On March 14, 2001, after defendants motion had been fully briefed
and argued, the court issued an order granting in part defendants motion and
giving plaintiffs leave to file an amended complaint. On April 13, 2001,
plaintiffs filed their first amended consolidated class action complaint. On
June 15, 2001, defendants moved to dismiss this new complaint and oral argument
on the motion occurred on December 17, 2001. On March 29, 2002, the court
denied the defendants motion to dismiss. The parties are now beginning the
discovery process.

The lawsuit seeks an unspecified amount of damages, in addition to other
forms of relief. We consider the lawsuits to be without merit and we intend to
defend vigorously against these allegations. However, the litigation could
prove to be costly and time consuming to defend, and there can be no assurances
about the eventual outcome.

On October 16, 2000, a lawsuit was filed against us and the individual
defendants (Zaki Rakib, Selim Rakib and Raymond Fritz) in the superior court of
San Luis Obispo County, California. This lawsuit is titled Bertram v. Terayon
Communications Systems, Inc., Case No. CV 000900 (Bertram). The Bertram
complaint contains factual allegations similar to those alleged in the federal
securities class action lawsuit. The complaint asserts causes of action under
California Business & Professions Code Sections 17200 et seq. and 17500 et seq.
for unlawful business practices, unfair and fraudulent business practices, and
false and misleading advertising. Plaintiffs purport to bring the action on
behalf of themselves and as representatives of all persons or entities in the
State of California and such other persons or entities outside California that
have been and are adversely affected by defendants activity, and as the Court
shall

18



---



##### Table of Contents



determine is not inconsistent with the exercise of the Courts
jurisdiction. Plaintiffs seek equitable and injunctive relief. Defendants
removed the Bertram case to the United States District Court, Central District
of California and, on January 19, 2001, filed a motion to dismiss the
complaint. A hearing on defendants motion was held March 26, 2001 and the
court granted Defendants motion to dismiss the action and denied Plaintiffs
motion requesting remand. On April 5, 2001, Defendants moved for an order
requiring further proceedings, if any to take place in the Northern District of
California. Plaintiffs did not oppose this motion and eventually entered into a
stipulation to go forward in the Northern District. On July 9, 2001, a status
conference was held in this case before Judge Patel. Plaintiffs did not appear
for the conference, and the court requested that defendants submit an order
dismissing the Bertram action with prejudice, which the defendants have
submitted to the court. We believe that these allegations, as with the
allegations in the federal securities case, are without merit and intends to
contest the matter vigorously.

We have learned that, on May 7, 2002, a shareholder filed a derivative
lawsuit on behalf of Terayon against its current directors, one former
director, and two former senior officers of the Company. This lawsuit is
titled Campbell vs. Rakib, et al.(No. CV807650), and is pending in the
California Superior Court, Santa Clara County. We are a nominal defendant in
this lawsuit, which alleges claims relating to essentially the same purportedly
misleading statements that are at issue in the pending securities class action.
In that litigation, We dispute that it made any misleading statements. The
derivative complaint also alleges claims relating to stock sales by certain of
the director and officer defendants.

We believe that there are numerous deficiencies in this lawsuit.

Liquidity and Capital Resources

At March 31, 2002, we had approximately $73.9 million in cash and cash
equivalents and $236.2 million in short-term investments.

Cash used in operating activities for the three months ended March 31,
2002 was $22.2 million compared to $52.9 million used in 2001. Uses of cash in
the quarter ended March 31, 2002 included the $4.1 million net loss and a $12.2
million increase in other assets relating primarily to cash which was
restricted due to certain operating lease commitments and is now classified in
other assets. In the quarter ended March 31, 2001, cash used by operating
activities was primarily related to decreases in accounts payable, deferred
taxes and other non-current liabilities.

Cash used in investing activities was $4.8 million in first quarter of
2002, compared to cash provided by investing activities of $79.0 million in
2001. Investing activities consisted primarily of the purchase and sale of
short-term investments.

Cash provided by financing activities was $0.9 million in first quarter of
2002, compared to cash used in financing activities of $76.4 million in 2001.
Financing activities typically consist of cash received through the exercise of
stock options and shares issued through stock purchase plans, which are offset
by principal payments on outstanding debt. In the first quarter of 2001, we
repurchased some of the Notes for $68.5 million in cash.

As of March 31, 2002, we had a standby letter of credit outstanding for
$9.0 million in support of certain operating lease commitments and another $4.2
million in letters of credit in support of purchase obligations.

We have unconditional purchase obligations to certain of our suppliers
that support our ability to manufacture our products. The obligations require
us to purchase minimum quantities of the suppliers products at a specified
price. As of March 31, 2002, we had approximately $75.7 million of purchase
obligations, of which $20.7 million is included on the balance sheet as accrued
vendor cancellation charges. The remaining obligations are expected to become
payable at various times through mid-2003.

19



---



##### Table of Contents



We believe that our current cash balances will be sufficient to satisfy
our cash requirements for at least the next 12 months. This estimate is a
forward-looking statement that involves risks and uncertainties, and actual
results may vary as a result of a number of factors, including those discussed
under the risk factor Our Operating Results May Fluctuate below and
elsewhere. We may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced services, respond to competitive pressures,
acquire complementary businesses or technologies or respond to unanticipated
requirements. We may seek to raise additional funds through private or public
sales of securities, strategic relationships, bank debt, financing under
leasing arrangements or otherwise. If additional funds are raised through the
issuance of equity securities, the percentage ownership of our stockholders
will be reduced, stockholders may experience additional dilution or such equity
securities may have rights, preferences or privileges senior to those of the
holders of our common stock. There can be no assurance that additional
financing will be available on acceptable terms, if at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
develop our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could have a
material adverse effect on our business, financial condition and operating
results.

Recent Financial Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets (SFAS 144). SFAS 144 supercedes
SFAS 121, Accounting for the Impairment of Long-lived Assets and Assets to
be Disposed of and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of Operations
-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transaction. SFAS
144 also amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of SFAS 144 were
adopted by the Company effective January 1, 2002 and did have a material effect
on Terayons financial position or results of operations.

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets (SFAS 141 and SFAS 142). SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising
from business combinations completed after June 30, 2001. SFAS 142 prohibits
the amortization of goodwill and intangible assets with indefinite useful
lives. SFAS 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized
over their estimated useful lives. Additionally, SFAS 142 requires that
goodwill included in the carrying value of equity method investments no longer
be amortized.

We adopted SFAS 142 on January 1, 2002. We reclassified identifiable
intangible assets with indefinite lives, as defined by SFAS 142, to goodwill
at the date of adoption. We test goodwill for impairment using the two-step
process prescribed in SFAS 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if
any. We performed the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of March 31, 2002 with no resulting
impairment charge.

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.

We Have a History of Losses.

20



---



##### Table of Contents



It is difficult to predict our future operating results. We began
shipping products commercially in June 1997, and we have been shipping products
in volume since the first quarter of 1998. As of March 31, 2002, we had an
accumulated deficit of $897.1 million. We believe that we will continue to
experience net losses for the foreseeable future. We generally are unable to
reduce our expenses significantly in the short term to compensate for any
unexpected delay or decrease in anticipated revenues. In addition, significant
delays in our commercialization of new products will adversely affect our
business. Moreover, even though we have experienced significant revenue growth
since our inception, the profit potential of our business remains unproven.

Our Operating Results May Fluctuate.

Our quarterly revenues are likely to fluctuate significantly in the future
due to a number of factors, many of which are outside our control.

Factors that could affect our revenues include, among others, the following:



| |  |  | variations in the timing of orders and shipments of our products;                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | variations in the size of the orders by our customers;                                                         
|
| |  |  | new product introductions by competitors;                                                                      
|
| |  |  | delays in our introduction of new products;                                                                    
|
| |  |  | delays in our receipt of and cancellation of orders forecasted by
customers;                                   
|
| |  |  | delays by our customers in the completion of upgrades to their cable
infrastructures;                          
|
| |  |  | variations in capital spending budgets of broadband service
providers; and                                     
|
| |  |  | adoption of industry standards and the inclusion in or compatibility of
our technology with any such standards.

A variety of factors affecting our gross margin include, among others, the
following:



| |  |  | the sales mix of our products;                                                               
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | the volume of products manufactured;                                                         
|
| |  |  | the type of distribution channel through which we sell our products;                         
|
| |  |  | the ASPs of our products; and                                                                
|
| |  |  | the costs of manufacturing our products and the effectiveness of our
cost reduction measures.

We anticipate that unit ASPs of our products will continue to decline in
the future. This could cause a decrease in the gross margins for these
products. In addition, the gross margins we realize from the sale of our
products are affected by the mix of product sales between higher margin, lower
volume headend equipment, such as CMTSs, and lower margin, higher volume CPE,
such as modems. We typically sell more headend equipment in connection with
new deployments of our systems. As deployments mature, we tend to sell more
CPE into the deployments compared to headend equipment. Sales of our CPE have
constituted, and we expect will continue to constitute, a significant portion
of our revenues.

21



---



##### Table of Contents



Our expenses generally vary from quarter to quarter depending on the level
of actual and anticipated business activities. Moreover, our research and
development expenses increase as we develop new products and our development
programs move to wafer fabrication and prototype development.

We Are Dependent on a Small Number of Customers.

A substantial majority of our revenues have been and will continue to be
derived from sales to a relatively small number of customers. Three customers
(one of which is a related party) accounted for approximately 56% of our
revenues for the quarter ended March 31, 2002. The loss of any one of these
customers could have a material adverse effect on our results of operations.
In addition, sales to our customers are and will continue to be focused on a
limited number of projects.

The markets we serve are undergoing significant consolidation in both
North America and internationally, as a limited number of service providers
control an increasing number of systems. Currently, ten cable operators in the
United States own and operate facilities passing approximately 82% of total
homes passed. In addition, the North American DSL market is concentrated with
the major ILECs constituting a significant percentage of the market. As a
result, our sales have been and will continue to be dependent upon product
acceptance by the leading broadband service providers.

The timing and size of each customers order is critical to our operating
results. Our major customers have significant negotiating leverage and
sometimes attempt to change the terms, including pricing, upon which we do
business with them. These customers may decide to purchase competitive products
from other vendors at any time and can reschedule or cancel purchase orders on
short notice. When purchasing product from us, these customers are requiring
longer payment terms than in the past, which requires us to maintain additional
capital to meet our working capital needs. Reduced spending in the cable and
telecom industries has had and may continue to have a negative impact on our
operations.

Acquisitions Could Result In Dilution, Operating Difficulties and Other Adverse
Consequences.

We acquired ten companies from September 1999 through December 2000. We
may acquire additional companies in the future. As a result of the Companys
decision to suspend certain product lines and product development efforts and
downturns in the broadband services and telecommunications industries, in
general, during 2001, we wrote-down approximately $572.8 million in intangible
assets relating to these acquisitions. The process of integrating any such
acquired company into our business and operations may be risky and may create
unforeseen operating difficulties and expenditures going forward.

Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of additional debt, contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could harm our business. Future acquisitions also could require us to
obtain additional equity or debt financing, which may not be available on
favorable terms or at all. Even if available, this financing may be dilutive.

The Sales Cycle for Our Products Is Lengthy.

The sales cycle for our products typically is lengthy, often lasting six
months to more than a year. Our customers typically conduct significant
technical evaluations of competing technologies prior to making a purchasing
decision. In addition, purchasing decisions may be delayed because of our
customers internal budget approval procedures. Sales also generally are
subject to customer trials, which typically last more than three months.
Because of the lengthy sales cycle and the large size of customer orders, if
orders forecasted for a specific customer for a particular quarter do not occur
in that quarter, our revenues and operating results could suffer.

There Are Many Risks Associated with Our Participation in DOCSIS.

22



---



##### Table of Contents



In January 2002, CableLabs announced that it had finished specifications
for an advanced generation of cable modems called DOCSIS 2.0. DOCSIS 2.0
incorporates two advanced physical layer modulation techniques, S-CDMA and
A-TDMA, that four companies, including us, had helped to develop. CableLabs
further announced that test plans were being finalized to allow for
interoperability testing in the first quarter of this year and possible
certification testing in the third quarter pending product maturity.

In connection with the finalization of the DOCSIS 2.0 specification, we
have contributed some aspects of our current proprietary S-CDMA technology to a
royalty-free intellectual property pool established by CableLabs to the extent
that the technology is included in the DOCSIS 2.0 specification. This
royalty-free pool facilitates the participation of as many vendors as possible
in providing equipment that is compatible with the DOCSIS specification. As a
result, any of our competitors who join the DOCSIS intellectual property pool
would have access to these aspects of our technology and would not be required
to pay us any royalties or other compensation for the use of our technology. If
a competitor is able to duplicate the functionality and capabilities of our
technology, we could lose some or all of the time-to-market advantage we might
otherwise have due to our familiarity with S-CDMA. This may adversely affect
our future revenues and operating results.

We believe the addition of advanced upstream physical layer (PHY)
capabilities to DOCSIS in the DOCSIS 2.0 specification could increase the
overall market for DOCSIS-compatible products and, as such, could result in
increased competition in the cable modem market. This competition could come
from existing competitors or from new competitors who enter the market. This
increased competition is likely to result in lower ASPs of cable products and
could harm revenues and gross margins. Because our competitors will be able to
incorporate some aspects of our technology into their products, our current
customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
cable products with advanced PHY capabilities from multiple suppliers. We may
be unable to produce DOCSIS compliant cable products with advanced PHY
capabilities more quickly or at lower cost than our competitors. As a result of
the inclusion of S-CDMA technology in the DOCSIS 2.0 specification, competition
for the services of our existing employees who have experience with S-CDMA
could increase. The loss of these employees to one or more competitors could
harm our business.

DOCSIS standards have not yet been accepted in Europe and Asia. An
alternate specification for cable products, called the Euro-DOCSIS
specification, has been formalized, and some European cable system operators
have embraced it. We intend to develop and sell products that comply with the
Euro-DOCSIS specification and to pursue having portions of our S-CDMA
technology included in a future version of the Euro-DOCSIS specification. We
may be unsuccessful in these efforts.

We Need to Develop New Products in Order to Remain Competitive.

Our future success depends on our ability to develop, market and sell new
products in a timely manner. We also must respond to competitive pressures,
evolving industry standards and technological advances. We are developing
products that include both S-CDMA and A-TDMA, the two modulation techniques
required by the DOCSIS 2.0 specification. There is no guarantee that our
products will pass testing to be DOCSIS certified or qualified. If we are
unable to certify or qualify our products as DOCSIS compliant in a timely
manner, we may lose some or all of the time to market advantage we might
otherwise have had, and our future operating results may be adversely affected.

Although we sell DOCSIS systems, the majority of our sales are derived
from our proprietary S-CDMA products, which are not DOCSIS compliant. Last
year, there were instances where our customers and potential customers delayed
or canceled purchases of our proprietary products in order to purchase products
that comply with the DOCSIS specification. In addition, there were instances
where our existing customers and potential new customers purchased
DOCSIS-compliant products from one or more of our competitors rather than
purchasing our products. We believe that this may be an increasing trend in the
future as service providers look to purchase DOCSIS certified or qualified
products. As a result, we have reduced our prices and continue to experience
customer demand to further reduce our prices in order to promote sales of our
current products. This has had and may continue to have an adverse impact on
our operating results and gross margin.

23



---



##### Table of Contents



Average Selling Prices of Broadband Access Equipment Typically Decrease.

The broadband access market has been characterized by erosion of ASPs. We
expect this to continue. This erosion is due to a number of factors, including
competition, rapid technological change and price performance enhancements. The
ASPs for our products may be lower than expected as a result of competitive
pricing pressures, promotional programs and customers who negotiate price
reductions in exchange for longer term purchase commitments. We anticipate that
ASPs and gross margins for our products will decrease over their life cycles.
In addition, we believe that the widespread adoption of industry standards is
further eroding ASPs, particularly for cable modems and other similar CPE. It
is likely that widespread adoption of industry standards will result in
increased retail distribution of cable modems and other similar CPE, which
could put further price pressure on our products. Decreasing ASPs could result
in decreased revenues even if the number of units sold increases. As a result,
we may experience substantial period-to-period fluctuations in future revenue
and operating results due to ASP erosion. Therefore, we must continue to
develop and introduce on a timely basis next-generation products with enhanced
functionalities that can be sold at higher gross margins. Our failure to do
this could cause our revenues and gross margin to decline.

We Must Achieve Cost Reductions.

Certain of our competitors currently offer products at prices lower than
ours. Market acceptance of our products will depend in part on reductions in
the unit cost of our products. We expect that as CMTS equipment becomes more
widely deployed, the price of cable modems and other similar CPE will decline.
In particular, we believe that the widespread adoption of industry standards
such as DOCSIS will cause increased price competition for CPE. However, we may
be unable to reduce the cost of our products sufficiently to enable us to
compete with other equipment manufacturers. Even if we achieve certain cost
reductions, it is not certain that these efforts will allow us to keep pace
with competitive pricing pressures or lead to gross margin improvement.

Some of our competitors are larger and manufacture products in
significantly greater quantities than we currently intend to manufacture for
the foreseeable future. Consequently, these competitors have more leverage in
obtaining favorable pricing from suppliers and manufacturers. In order to
remain competitive, we must significantly reduce the cost of manufacturing our
products through design and engineering changes. We may not be successful in
redesigning our products. Even if we are successful, our redesign may be
delayed or may contain significant errors and product defects. In addition, any
redesign may not result in sufficient cost reductions to allow us to reduce
significantly the list price of our products or improve our gross margin.
Reductions in our manufacturing costs will require us to use more highly
integrated components in future products and may require us to enter into high
volume or long-term purchase or manufacturing agreements. Volume purchase or
manufacturing agreements may not be available on acceptable terms. We could
incur expenses without related revenues if we enter into a high volume or
long-term purchase or manufacturing agreements and then decide that we cannot
use the products or services offered by the agreement. We have incurred
cancellation charges in the past and may incur such charges in the future.

We Must Keep Pace with Rapid Technological Change to Remain Competitive.

The markets for our products are characterized by rapid technological
change, evolving industry standards, changes in end-user requirements and
frequent new product introductions and enhancements. Our future success will
depend upon our ability to enhance our existing products and to develop and
introduce new products that achieve market acceptance. Service providers may
adopt alternative technologies or may deploy alternative services that are
incompatible with our products.

In January 2002, CableLabs announced that it had finished specifications
for an advanced generation of cable products called DOCSIS 2.0. DOCSIS 2.0
incorporates two advanced physical layer modulation techniques, S-CDMA and
A-TDMA. We believe that, as DOCSIS 2.0 gains acceptance among cable operators,
our future success depends on our ability to manufacture, market and sell cable
products

24



---



##### Table of Contents



certified and qualified as meeting the DOCSIS 2.0 specification. Our
inability to produce DOCSIS 2.0 compliant cable products more quickly or at
lower cost than our competitors may adversely affect our future results of
operations.

Broadband Access Services Have Not Achieved Widespread Market Acceptance, and
Many Competing Technologies Exist.

Our success will depend upon the widespread acceptance of broadband
services by providers and end users. The markets for these services are not
fully developed. We cannot accurately predict the future growth rate or the
ultimate size of the market for broadband services. Potential users of our
products may have concerns regarding the security, reliability, cost, ease of
installation and use and capability of broadband services in general.

The markets for our products may be impacted by the development of other
technologies that enable the provisioning of broadband services and the
deployment of services over other media. Widespread acceptance of other
technologies or deployment of services over media not supported by our products
could materially limit acceptance of our products. Broadband services based on
our products and technology may fail to gain widespread commercial acceptance
by service providers and end users. We may not be successful in marketing and
selling these products.

We Need to Develop Additional Distribution Channels.

We presently market our products to service providers. With changes in the
industry, we may need to establish new, additional distribution channels. For
example, we believe that much of the North American market for CPE may shift to
a retail distribution model. Accordingly, we may need to redirect our future
marketing efforts to sell our CPE directly to retail distributors and end
users. This shift would require us to establish new distribution channels for
these products.

We face many challenges in establishing these new distribution channels.
These challenges include, among others, the following:



| |  |  | our inability to hire additional personnel necessary to establish and
enhance these new distribution channels;                                                                                                                                                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to the extent that large consumer electronics companies enter the
cable modem market, their well-established retail distribution
capabilities would provide them with a significant competitive advantage;                                                                                                                                         
|
| |  |  | our potential customers are likely to prefer purchasing products from
established manufacturing companies that can demonstrate the capability
to supply large volumes of products on short notice; and                                                                                                                                             
|
| |  |  | many of our potential customers may be reluctant to adopt technologies
that have not gained acceptance among other providers of similar
services. This reluctance could result in lengthy product testing and
acceptance cycles for our products. Consequently, the impediments to our
initial sales may be even greater than those to later sales.

The vast majority of our sales are to larger, more established service
providers that are critical to our business. We do not have access to smaller
or geographically diverse service providers. Although we intend to establish
strategic relationships with leading distributors worldwide to access these
customers, we may not succeed in establishing these relationships. Even if we
do establish these relationships, the distributors may not succeed in marketing
our products to their customers. Some of our competitors have already
established, long-standing relationships with these service providers that may
limit our and our distributors ability to sell our products to those
customers. Even if we were to sell our products to those customers, it would
likely not be based on long-term commitments, and those customers would be able
to terminate their relationships with us at any time.

25



---



##### Table of Contents



We Are Dependent on Service Providers Choosing to Offer Additional Services to
Their Customers.

We depend on service providers to purchase our products. Service providers
have a limited amount of available bandwidth over which they can offer new
services, such as high speed Internet access and telephony. They may choose
not to provide these new services to their customers. When service providers
choose to provide these new services, we depend upon them to market these
services to their customers, to install our equipment and to provide support to
end-users. In addition, we depend on these service providers to continue to
maintain their infrastructures in a manner that allows us to provide
consistently high performance and reliable services.

Sales of Our Cable Products Are Dependent on the Cable Industry Upgrading to
Two-Way Cable Infrastructure.

Demand for our cable products will depend, to a significant degree, upon
the magnitude and timing of capital spending by cable operators for
implementation of access systems for data transmission over cable networks.
This involves the enabling of two-way transmission over existing coaxial cable
networks and the eventual upgrade to hybrid fiber coaxial (HFC) in areas of
higher penetration of data services. If cable operators fail to complete these
upgrades of their cable infrastructures in a timely and satisfactory manner,
the market for our products could be limited. In addition, few businesses in
the United States currently have cable access. Cable operators may not choose
to upgrade existing residential cable systems or to install new cable systems
to serve business locations.

The success and future growth of our cable business will be subject to
economic and other factors affecting the cable television industry generally,
particularly its ability to finance substantial capital expenditures. Capital
spending levels in the cable industry in the United States and internationally
have fluctuated significantly in the past, and we believe that such
fluctuations will occur in the future. We are currently experiencing reduced
levels of spending in the cable industry. The capital spending patterns of
cable operators are dependent on a variety of factors, including the following:



| |  |  | the availability of financing;                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------
|
| |  |  | annual budget cycles, as well as the typical reduction
in upgrade projects during the winter months;               
|
| |  |  | the status of federal, local and foreign government regulation and
deregulation of the telecommunications industry;
|
| |  |  | overall demand for broadband services;                                                                             
|
| |  |  | competitive pressures (including the availability of alternative data
transmission and access technologies);       
|
| |  |  | discretionary consumer spending patterns; and                                                                      
|
| |  |  | general economic conditions.                                                                                       

In recent years, the cable market has been characterized by the
acquisition of smaller and independent cable operators by larger operators. We
cannot predict the effect, if any, that such consolidation will have on overall
capital spending patterns by cable operators. The effect on our business of
further industry consolidation also is uncertain.

Supply of Our Products Depends On Our Ability to Forecast Demand Accurately.

The emerging nature of the broadband services market makes it difficult
for us to accurately forecast demand for our products. Our inability to
forecast accurately the actual demand for our products

26



---



##### Table of Contents



may result in too much or too little supply of product or an over/under
capacity of manufacturing or testing resources at any given point in time. The
existence of any one or more of these situations could have a negative impact
on our business, operating results or financial condition. We had purchase
obligations of approximately $75.7 million as of March 31, 2002, primarily to
purchase minimum quantities of materials and components used to manufacture our
products. We must fulfill these obligations even if demand for our products is
lower than we anticipate.

Our Business May Be Affected By Conditions In Israel.

Our operations may be affected by conditions in Israel because of our
significant operations there. 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 continued to escalate over the past year, which could disrupt some of our
operations. We could be adversely affected by any major hostilities involving
Israel. As a result of the hostilities and unrest presently occurring within
Israel, the future of the peace efforts between Israel and its Arab neighbors
is uncertain. A number of our employees based in Israel are currently obligated
to perform annual military reserve duty and are subject to being called to
active duty at any time under emergency circumstances. We cannot assess the
full impact of these requirements and the hostilities on our workforce,
business or operations if conditions should change, and we cannot predict the
effect of any expansion or reduction of these obligations or the hostilities.

We May Have Financial Exposure to Litigation Against Our Directors and
Officers.

We and/or our directors and officers are defendants in a number of
lawsuits, including securities litigation lawsuits. As a result, we may have
financial exposure to litigation as a defendant and because we are obligated to
indemnify our executive officers and members of our Board of Directors for
certain actions taken by our officers and directors on our behalf. In order to
limit financial exposure arising from litigation and/or our obligation to
indemnify our officers and directors, we purchase insurance.

In October 2001, Reliance Insurance Co. (Reliance) was placed into
liquidation by the state of Pennsylvania. Reliance was the underwriter for one
excess layer of our directors and officers insurance for the period covering
the claims made against the company and its officers in the pending securities
litigation. Because Reliance is in liquidation, we may have to pay the amount
insured under the Reliance policy ($2.5 million).

We Are Dependent on Key Third-Party Suppliers.

We manufacture all of our products using components or subassemblies
procured from third-party suppliers. Some of these components are available
from a sole source and others are available from limited sources. A majority of
our sales are from products containing one or more components that are
available only from sole source suppliers.

In addition, some of our components are custom parts produced to our
specifications. For example, we have relied and will continue to rely on sole
source semiconductor manufacturers to supply us with custom ASICs for use in
our products. Additional components, such as the radio frequency tuner and
some surface acoustic wave filters, are also procured from sole source
suppliers. Any interruption in the operations of vendors of sole source parts
could adversely affect our ability to meet our scheduled product deliveries to
customers. We are dependent on semiconductor manufacturers and are affected by
worldwide conditions in the semiconductor market. If we are unable to obtain a
sufficient supply of components from our current sources, we could experience
difficulties in obtaining alternative sources or in altering product designs to
use alternative components. Resulting delays or reductions in product shipments
could damage customer relationships. Further, a significant increase in the
price of one or more of these components could harm our gross margin or
operating results.

27



---



##### Table of Contents



We May Be Unable to Migrate to New Semiconductor Process Technologies
Successfully or on a Timely Basis.

Our future success will depend in part upon our ability to develop
products that utilize new semiconductor process technologies. These
technologies change rapidly and require us to spend significant amounts on
research and development. We continuously evaluate the benefits of redesigning
our integrated circuits using smaller geometry process technologies to improve
performance and reduce costs. The transition of our products to integrated
circuits with increasingly smaller geometries will be important to our
competitive position. Other companies have experienced difficulty in migrating
to new semiconductor processes and, consequently, have suffered reduced yields,
delays in product deliveries and increased expense levels. Moreover, we depend
on our relationship with our third-party manufacturers to migrate to smaller
geometry processes successfully.

Our Ability to Directly Control Product Delivery Schedules and Product Quality
Is Dependent on Third-Party Contract Manufacturers.

Most of our products are assembled and tested by contract manufacturers
using testing equipment that we provide. As a result of our dependence on these
contract manufacturers for assembly and testing of our products, we do not
directly control product delivery schedules or product quality. Any product
shortages or quality assurance problems could increase the costs of
manufacture, assembly or testing of our products. In addition, as manufacturing
volume increases, we will need to procure and assemble additional testing
equipment and provide it to our contract manufacturers. The production and
assembly of testing equipment typically requires significant lead times. We
could experience significant delays in the shipment of our products if we are
unable to provide this testing equipment to our contract manufacturers in a
timely manner.

There Are Many Risks Associated with International Operations.

We expect sales to customers outside of the United States to continue to
represent a significant percentage of our revenues for the foreseeable future.

International sales are subject to a number of risks, including the following:



| |  |  | changes in foreign government regulations and communications standards;
| | - |  | -----------------------------------------------------------------------
|
| |  |  | export license requirements, tariffs and taxes;                        
|
| |  |  | trade barriers;                                                        
|
| |  |  | difficulty in protecting intellectual property;                        
|
| |  |  | difficulty in collecting accounts receivable;                          
|
| |  |  | difficulty in managing foreign operations; and                         
|
| |  |  | political and economic instability.                                    

If our customers are affected by currency devaluations or general economic
crises, such as the recent economic crises affecting many Asian and Latin
American economies, their ability to purchase our products could be reduced
significantly. Payment cycles for international customers typically are longer
than those for customers in North America. Foreign countries may decide to
prohibit, terminate or delay the construction of new broadband services
infrastructures for a variety of reasons. These reasons include environmental
issues, economic downturns, availability of favorable pricing for other
communications services or the availability and cost of related equipment. Any
action like this by foreign countries would reduce the market for our products.

28



---



##### Table of Contents



While we generally invoice our foreign sales in U.S. dollars, we do
invoice our sales into Brazil in reals and our sales in Europe in euros. We
currently do not engage in foreign currency hedging transactions. As we expand
our international operations, payments to us in foreign currencies and our
exposure to losses as the result of foreign currency fluctuations may increase.
We may choose to limit our exposure by the purchase of forward foreign exchange
contracts or through similar hedging strategies. No currency hedging strategy
can fully protect against exchange-related losses. In addition, if the relative
value of the U.S. dollar in comparison to the currency of our foreign customers
should increase, the resulting effective price increase of our products to
those foreign customers could result in decreased sales.

We May Be Unable to Provide Adequate Customer Support.

Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our broadband products, particularly in the initial deployment
and implementation stages. To date, our sales have been concentrated in a small
number of customers. We have limited experience with widespread deployment of
our products to a diverse customer base. We may not have adequate personnel to
provide the levels of support that our customers may require during initial
product deployment or on an ongoing basis. Our inability to provide sufficient
support to our customers could delay or prevent the successful deployment of
our products. In addition, our failure to provide adequate support could harm
our reputation and relationships with our customers and could prevent us from
gaining new customers.

Our Industry Is Highly Competitive with Many Established Competitors.

The market for our products is extremely competitive and is characterized
by rapid technological change. Our direct competitors in the cable arena
include Cisco Systems, ADC, Arris, Juniper Networks, Com21, Motorola, Nortel
Networks, Thomson Consumer Electronics (which markets products under the brand
name RCA), Samsung, Scientific-Atlanta and Toshiba. We also compete with
companies that develop integrated circuits for broadband products, such as
Broadcom, Conexant and Texas Instruments. In addition, we compete with
companies in the DSL arena such as Alcatel, Siemens, Lucent, Nortel Networks,
Efficient Networks, Zhone, Marconi, Charles Industries, Accelerated Networks
and Integral Access. The principal competitive factors in our market include
the following:



| |  |  | product performance, features and reliability;        
| | - |  | ------------------------------------------------------
|
| |  |  | price;                                                
|
| |  |  | size and stability of operations;                     
|
| |  |  | breadth of product line;                              
|
| |  |  | sales and distribution capabilities;                  
|
| |  |  | technical support and service;                        
|
| |  |  | relationships with providers of service providers; and
|
| |  |  | compliance with industry standards.                   

Some of these factors are outside of our control. The existing conditions
in the market for broadband services could change rapidly and significantly as
a result of technological advancements. The development and market acceptance
of alternative technologies could decrease the demand for our products or
render them obsolete. Our competitors may introduce products that are less
costly, provide superior performance or achieve greater market acceptance than
our products.

29



---



##### Table of Contents



Many of our current and potential competitors have greater financial,
technical, marketing, distribution, customer support and other resources, as
well as better name recognition and access to customers than we do. The
widespread adoption of DOCSIS and other industry standards is likely to cause
increased worldwide price competition, particularly in the North American
market. We believe that the adoption of these standards have resulted in and
are likely to continue to result in lower sales of our proprietary S-CDMA
products. Any increased price competition or reduction in sales of our
products, particularly our higher margin headend products, would result in
downward pressure on our gross margin. These competitive pressures have and are
likely to continue to adversely impact our business.

Our Business Is Dependent on the Internet and the Development of Internet
Infrastructure.

Our success depends on increased demand for high-speed Internet services
for commercial use. Critical issues concerning the commercial use of the
Internet remain largely unresolved and are likely to affect the development of
the market for our products. These issues include security, reliability, cost,
ease of access and quality of service. Our success also will depend on the
growth of the use of the Internet by businesses for multimedia applications
that require high bandwidth. The recent growth in the use of the Internet has
caused frequent periods of performance degradation. This has required the
upgrade of routers, telecommunications links and other components forming the
infrastructure of the Internet by service providers and other organizations
with links to the Internet. Any perceived degradation in the performance of
the Internet as a whole could undermine the benefits of our products.

We Are Dependent on Key Personnel.

Due to the specialized nature of our business, we are highly dependent on
the continued service of, and on the ability to attract and retain, qualified
engineering, sales, marketing and senior management personnel. The competition
for some of these personnel is intense. The loss of any of these individuals
may harm our business. In addition, if we are unable to hire qualified
personnel as needed, we may be unable to adequately manage and grow our
business.

Highly skilled employees with the education and training that we require,
especially employees with significant experience and expertise in both data
networking and radio frequency design, are in high demand. We may be unable to
continue to attract and retain qualified personnel necessary for the
development of our business. We do not have key person insurance coverage for
the loss of any of our employees. Any officer or employee can terminate his or
her relationship with us at any time. Our employees are not bound by
non-competition agreements with us.

Our Business Is Subject to the Risks of Product Returns, Product Liability and
Product Defects.

Products like ours are very complex and frequently contain undetected
errors or failures, especially when first introduced or when new versions are
released. Despite testing, errors may occur. The occurrence of errors could
result in product returns and other losses to us and/or our customers. This
occurrence could result in the loss of or delay in market acceptance of our
products. We have limitation of liability provisions in our standard terms and
conditions of sale. However, these terms and conditions may not be effective
as a result of federal, state or local laws or ordinances or unfavorable
judicial decisions in the United States or other countries. The sale and
support of our products entails the risk of product liability claims. In
addition, any failure by our products to properly perform could result in
claims against us by our customers. We maintain insurance to protect against
certain claims associated with the use of our products, but our insurance
coverage may not adequately cover any claim asserted against us. In addition,
even claims that ultimately are unsuccessful could result in our expenditure of
funds in litigation and management time and resources.

We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.

30



---



##### Table of Contents



We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights
in our products. Even though we seek to establish and protect proprietary
rights in our products, there are risks. Our pending patent applications may
not be granted. Even if they are granted, the claims covered by the patent may
be reduced from those included in our applications. Any patent might be
subject to challenge in court and, whether or not challenged, might not be
broad enough to prevent third parties from developing equivalent technologies
or products without a license from us.

We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with many of
our suppliers, distributors and appropriate customers so as to limit access to
and disclosure of our proprietary information. These contractual arrangements,
as well as statutory protections, may not prove sufficient to prevent
misappropriation of our technology or deter independent third-party development
of similar technologies. In addition, the laws of some foreign countries may
not protect our intellectual property rights to the same extent as do the laws
of the United States.

CableLabs DOCSIS 2.0 specification includes two modulation techniques,
S-CDMA and A-TDMA. In connection with the development of the DOCSIS 2.0
specification by CableLabs, we entered into an agreement with CableLabs whereby
we licensed to CableLabs any of our intellectual property rights to the extent
that such rights may be asserted against a party desiring to design,
manufacture or sell DOCSIS based products, including DOCSIS 2.0 based products.
This license agreement grants to CableLabs the right to sublicense our
intellectual property, including our intellectual property rights in our S-CDMA
patents, to manufacturers that compete with us in the marketplace for DOCSIS
based products.

We pursue the registration of our trademarks in the United States and have
applications pending to register several of our trademarks throughout the
world. However, the laws of certain foreign countries might not protect our
products or intellectual property rights to the same extent as the laws of the
United States. Effective trademark, copyright, trade secret and patent
protection may not be available in every country in which our products may be
manufactured, marketed or sold.

Our Business And Our Customers Are Subject to Regulation.

Our business and customers are subject to varying degrees of regulation by
regulatory bodies in the United States and foreign countries. Although these
regulations have not materially restricted our operations to date or the
operations of our customers, future regulations applicable to our business or
customers could be adopted. The adoption of future regulations may adversely
affect our customers, our ability to sell our products and therefore our
operating results.

Our Products Are Subject to Approvals and Certifications.

In the United States, our products are required to meet certain safety
requirements. For example, we are required to have our products certified by
Underwriters Laboratory in order to meet federal requirements relating to
electrical appliances to be used inside the home. Outside the United States,
our products are subject to the regulatory requirements of each country in
which the products are manufactured or sold. These requirements are likely to
vary widely. We may be unable to obtain on a timely basis or at all the
regulatory approvals that may be required for the manufacture, marketing and
sale of our products. In addition to regulatory compliance, some cable
operators require that our products be certified or qualified as having met
DOCSIS or Euro-DOCSIS specifications.

We Are Vulnerable to Earthquakes, Power Outages and Other Unexpected Events.

Our corporate headquarters, as well as the majority of our research and
development activities and some manufacturing operations are located in
California, an area known for seismic activity. In addition, the operations of
some of our key suppliers are also located in this area and in other areas
known for seismic activity, such as Taiwan. An earthquake, or other significant
natural disaster, could result in an interruption in our business or the
operations of one or more of our key suppliers. Such an interruption

31



---



##### Table of Contents



could harm our operating results. We may not carry sufficient business
interruption insurance to compensate for any losses that we may sustain as a
result of any natural disasters or other unexpected events.

Our Indebtedness Could Adversely Affect our Financial Condition; We May Incur
Substantially More Debt.

As of March 31, 2002, we had approximately $174.1 million of indebtedness
outstanding. This high level of indebtedness may adversely affect our
stockholders by:



| |  |  | making it more difficult for us to satisfy our obligations with respect
to our indebtedness;                                                                                                                                                                                                                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increasing our vulnerability to general adverse economic and industry
conditions;                                                                                                                                                                                                                                
|
| |  |  | limiting our ability to obtain additional financing;                                                                                                                                                                                                                                                             
|
| |  |  | requiring the dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of our cash flow to fund
our growth strategy, working capital, capital expenditures and other
general corporate purposes;
|
| |  |  | limiting our flexibility in planning for, or reacting to, changes in
our business and the industry; and                                                                                                                                                                                                          
|
| |  |  | placing us at a competitive disadvantage relative to our competitors
with less debt.                                                                                                                                                                                                                             

We may incur substantial additional debt in the future. The terms of our
outstanding debt do not fully prohibit us from doing so. If new debt is added
to our current levels, the related risks described above could intensify.

Our Stock Price Has Been and Is Likely to Continue To Be Highly Volatile.

The trading price of our common stock has been and is likely to continue
to be highly volatile. Our stock price could be subject to extreme fluctuations
in response to a variety of factors, including the following:



| |  |  | actual or anticipated variations in quarterly operating results;                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | announcements of technological innovations;                                                                              
|
| |  |  | new products or services offered by us or our competitors;                                                               
|
| |  |  | changes in financial estimates by securities analysts;                                                                   
|
| |  |  | conditions or trends in the broadband services industry;                                                                 
|
| |  |  | changes in the economic performance and/or market valuations of
Internet, online service or broadband service industries;
|
| |  |  | our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;             

32



---



##### Table of Contents





| |  |  | adoption of industry standards and the inclusion or compatibility of
our technology with such standards;
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | adverse or unfavorable publicity regarding us or our products;                                          
|
| |  |  | additions or departures of key personnel;                                                               
|
| |  |  | sales of common stock; and                                                                              
|
| |  |  | other events or factors that may be beyond our control.                                                 

In addition, the stock markets in general, and the Nasdaq National Market
and the market for broadband services and technology companies in particular,
have experienced extreme price and volume volatility and a significant
cumulative decline over the last year. This volatility and decline has affected
many companies irrespective of or disproportionately to the operating
performance of these companies. Additionally, industry factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk.

Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. The primary objective of our investment
activities is to preserve principal while maximizing yields without
significantly increasing risk. This is accomplished by investing in widely
diversified short-term investments, consisting primarily of investment grade
securities, substantially all of which mature within the next twenty-four
months. A hypothetical 50 basis point increase in interest rates would result
in an approximate $685,000 decline (less than 0.3%) in the fair value of our
available-for-sale securities.

Foreign Currency Risk.

A substantial majority of our revenue, expense and capital purchasing
activity are transacted in U.S. dollars. However, we do enter into transactions
in Belgium, United Kingdom, Hong Kong, Canada and Israel. An adverse change of
10% in exchange rates would result in a decline in income before taxes of
approximately $550,000.

All of the potential changes noted above are based on sensitivity analyses
performed as of March 31, 2002. Actual results may differ materially.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

See Litigation under PART I, ITEM 2, MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

33



---



##### Table of Contents






ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None




ITEM 5. OTHER INFORMATION

None




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

EXHIBIT INDEX

|        |  |                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                            
|Number  |  | Exhibit Description                                                                                                                                                        
|        |  |                                                                                                                                                                            
|3.1     |  | Amended and Restated Certificate of Incorporation of Terayon Communication
Systems, Inc.(7)                                                                                
|3.2     |  | Bylaws of Terayon Communication Systems, Inc.(2)                                                                                                                           
|3.3     |  | Certificate of Amendment to Amended and Restated Certificate of
Incorporation of Terayon Communication Systems, Inc.(7)                                                    
|3.4     |  | Certificate of Designation of Series A Junior Participating Preferred Stock. (9)                                                                                           
|4.1     |  | Specimen Common Stock Certificate.(2)                                                                                                                                      
|4.2     |  | Amended and Restated Information and Registration Rights Agreement dated April
6, 1998.(2)                                                                                 
|4.3     |  | Form of Security for Terayon Communication Systems, Inc.s 5% Convertible
Subordinated Notes due August 1, 2007.(8)                                                        
|4.4     |  | Registration Rights Agreement by and among Terayon Communication Systems, Inc.
and Deutsche Bank Securities, Inc. and Lehman Brothers, Inc.(8)                             
|4.5     |  | Indenture between Terayon Communication Systems, Inc. and State Street Bank and
Trust Company of California, N.A. dated July 26, 2000.(8)                                  
|10.1    |  | Form of Indemnity Agreement between Terayon Communication Systems, Inc. and each
of its directors and officers.(2)                                                         
|10.2    |  | 1995 Stock Option Plan, as amended on March 26, 1996.(2)                                                                                                                   
|10.3    |  | 1997 Equity Incentive Plan, as amended on July 31, 2000.(11)                                                                                                               
|10.4    |  | 1998 Employee Stock Purchase Plan, as amended on July 31, 2000.(9)                                                                                                         
|10.5    |  | 1998 Non-Employee Directors Stock Option Plan.(2)                                                                                                                          
|10.6    |  | 1998 Employee Stock Purchase Plan Offering for Foreign Employees, adopted July
31, 2000.(9)                                                                                
|10.7    |  | Anti-Dilution Warrant to Purchase Shares of Common Stock dated April 6, 1998
issued to Shaw Communications Inc.(2)                                                         
|10.8    |  | Lease Agreement dated April 20, 1998 between Imedia Corporation and Martin CL
Associate, L.P.(5)                                                                           
|10.9    |  | Sublease Agreement dated November 15, 1999 between Imedia Corporation and ISP
Channel, Inc.(5)                                                                             
|10.10   |  | 1999 Non-Officer Equity Incentive Plan, as amended February 14, 2001.(9)                                                                                                   
|10.11   |  | Form of Non-Statutory Stock Option Agreement Used in Connection with the 1999
Non-Officer Equity Incentive Plan.(6)                                                        
|10.12   |  | Real Property Lease, dated March 1, 1990, among Menlo Business Park and Raychem
Corporation.(10)                                                                           
|10.13   |  | Assignment and Guarantee Agreement, dated April 21, 2000, by and between Terayon
Communication Systems, Inc. Tyco Electronics Corporation and Menlo Business
Park, LLC.(10)
|10.14   |  | Azrieli Center Offices Lease Agreement, dated January 23, 2000, between Canit
HaShalom Investments Ltd. and Terayon Communication Systems, Inc.(11)                        

34



---



##### Table of Contents



|        |  |                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                     
|Number  |  | Exhibit Description                                                                                                                                                                 
|        |  |                                                                                                                                                                                     
|10.15   |  | Data Over Cable Service Interface Specifications License Agreement, dated
December 21, 2001, between Terayon Communication Systems, Inc. and Cable
Television Laboratories, Inc.(11)
|10.16   |  | Amendment to DOCSIS IPR Agreement to cover DOCSIS 2.0, dated December 21, 2001,
between Terayon Communication Systems, Inc. and Cable Television Laboratories,
Inc.(11)             
|10.17   |  | Data Over Cable Service Interface Specifications License Agreement, dated
December 21, 2001, between Imedia Semiconductor Corporation and Cable Television
Laboratories, Inc.(11)   
|10.18   |  | Amendment to DOCSIS IPR Agreement to cover DOCSIS 2.0, dated December 21, 2001,
between Imedia Semiconductor Corporation and Cable Television Laboratories, Inc.
(11)               
|10.19   |  | Lease, dated September 18, 1996, between Sobrato Interests III and VeriFone, Inc.                                                                                                   
|10.20   |  | Sublease, dated April 1, 2002, by and between Terayon Communication Systems,
Inc. and Hewlett-Packard Company.                                                                      
|21.1    |  | List of Subsidiaries.(11)                                                                                                                                                           



---

|(1)  |  | Incorporated by reference to exhibits to our Registration Statement on
Form S-1 filed on December 24, 1998 (File No. 333-69699).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to exhibits to our Registration Statement on
Form S-1 filed on June 16, 1998 (File No. 333-56911).    
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to our Report on Form 10-Q filed on November
12, 1998 (File No. 000-24647).                           
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to our Report on Form 10-Q filed on August 13,
1999.                                                  
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to our Report on Form 10-Q filed on November
15, 1999.                                                
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to our Registration Statement on Form S-8 filed
on December 29, 1999.                                 
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to our Report on Form 10-K filed on March 30,
2000.                                                   
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to our Registration Statement on Form S-3 filed
on October 24, 2000 (File No. 333-48536)              
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to our Report on Form 10-K filed on April 2,
2001.                                                    
|    
|    
|    
|    
|(10) |  | Incorporated by reference to our Report on Form 10-Q filed on May 15,
2001.                                                     
|    
|    
|    
|    
|(11) |  | Incorporated by reference to our Report on Form 10-K filed on April 1,
2002.                                                    

(b)  Reports on Form 8-K.

None.

35



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                   |  |                                                 
|------------------ |  | ------------------------------------------------
|Date: May 14, 2002 |  | TERAYON COMMUNICATION SYSTEMS,
        INC.     
|                   |  |                                                 
|                   |  | By /s/ Carol Lustenader                         
|                   |  | Carol Lustenader
        Chief Financial Officer
|                   | 

36



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                            
|Number  |  | Exhibit Description                                                                                                                                                        
|        |  |                                                                                                                                                                            
|3.1     |  | Amended and Restated Certificate of Incorporation of Terayon Communication
Systems, Inc.(7)                                                                                
|3.2     |  | Bylaws of Terayon Communication Systems, Inc.(2)                                                                                                                           
|3.3     |  | Certificate of Amendment to Amended and Restated Certificate of
Incorporation of Terayon Communication Systems, Inc.(7)                                                    
|3.4     |  | Certificate of Designation of Series A Junior Participating Preferred Stock. (9)                                                                                           
|4.1     |  | Specimen Common Stock Certificate.(2)                                                                                                                                      
|4.2     |  | Amended and Restated Information and Registration Rights Agreement dated April
6, 1998.(2)                                                                                 
|4.3     |  | Form of Security for Terayon Communication Systems, Inc.s 5% Convertible
Subordinated Notes due August 1, 2007.(8)                                                        
|4.4     |  | Registration Rights Agreement by and among Terayon Communication Systems, Inc.
and Deutsche Bank Securities, Inc. and Lehman Brothers, Inc.(8)                             
|4.5     |  | Indenture between Terayon Communication Systems, Inc. and State Street Bank and
Trust Company of California, N.A. dated July 26, 2000.(8)                                  
|10.1    |  | Form of Indemnity Agreement between Terayon Communication Systems, Inc. and each
of its directors and officers.(2)                                                         
|10.2    |  | 1995 Stock Option Plan, as amended on March 26, 1996.(2)                                                                                                                   
|10.3    |  | 1997 Equity Incentive Plan, as amended on July 31, 2000.(11)                                                                                                               
|10.4    |  | 1998 Employee Stock Purchase Plan, as amended on July 31, 2000.(9)                                                                                                         
|10.5    |  | 1998 Non-Employee Directors Stock Option Plan.(2)                                                                                                                          
|10.6    |  | 1998 Employee Stock Purchase Plan Offering for Foreign Employees, adopted July
31, 2000.(9)                                                                                
|10.7    |  | Anti-Dilution Warrant to Purchase Shares of Common Stock dated April 6, 1998
issued to Shaw Communications Inc.(2)                                                         
|10.8    |  | Lease Agreement dated April 20, 1998 between Imedia Corporation and Martin CL
Associate, L.P.(5)                                                                           
|10.9    |  | Sublease Agreement dated November 15, 1999 between Imedia Corporation and ISP
Channel, Inc.(5)                                                                             
|10.10   |  | 1999 Non-Officer Equity Incentive Plan, as amended February 14, 2001.(9)                                                                                                   
|10.11   |  | Form of Non-Statutory Stock Option Agreement Used in Connection with the 1999
Non-Officer Equity Incentive Plan.(6)                                                        
|10.12   |  | Real Property Lease, dated March 1, 1990, among Menlo Business Park and Raychem
Corporation.(10)                                                                           
|10.13   |  | Assignment and Guarantee Agreement, dated April 21, 2000, by and between Terayon
Communication Systems, Inc. Tyco Electronics Corporation and Menlo Business
Park, LLC.(10)
|10.14   |  | Azrieli Center Offices Lease Agreement, dated January 23, 2000, between Canit
HaShalom Investments Ltd. and Terayon Communication Systems, Inc.(11)                        





---



##### Table of Contents



|        |  |                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                     
|Number  |  | Exhibit Description                                                                                                                                                                 
|        |  |                                                                                                                                                                                     
|10.15   |  | Data Over Cable Service Interface Specifications License Agreement, dated
December 21, 2001, between Terayon Communication Systems, Inc. and Cable
Television Laboratories, Inc.(11)
|10.16   |  | Amendment to DOCSIS IPR Agreement to cover DOCSIS 2.0, dated December 21, 2001,
between Terayon Communication Systems, Inc. and Cable Television Laboratories,
Inc.(11)             
|10.17   |  | Data Over Cable Service Interface Specifications License Agreement, dated
December 21, 2001, between Imedia Semiconductor Corporation and Cable Television
Laboratories, Inc.(11)   
|10.18   |  | Amendment to DOCSIS IPR Agreement to cover DOCSIS 2.0, dated December 21, 2001,
between Imedia Semiconductor Corporation and Cable Television Laboratories, Inc.
(11)               
|10.19   |  | Lease, dated September 18, 1996, between Sobrato Interests III and VeriFone, Inc.                                                                                                   
|10.20   |  | Sublease, dated April 1, 2002, by and between Terayon Communication Systems,
Inc. and Hewlett-Packard Company.                                                                      
|21.1    |  | List of Subsidiaries.(11)                                                                                                                                                           



---

|(1)  |  | Incorporated by reference to exhibits to our Registration Statement on
Form S-1 filed on December 24, 1998 (File No. 333-69699).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to exhibits to our Registration Statement on
Form S-1 filed on June 16, 1998 (File No. 333-56911).    
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to our Report on Form 10-Q filed on November
12, 1998 (File No. 000-24647).                           
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to our Report on Form 10-Q filed on August 13,
1999.                                                  
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to our Report on Form 10-Q filed on November
15, 1999.                                                
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to our Registration Statement on Form S-8 filed
on December 29, 1999.                                 
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to our Report on Form 10-K filed on March 30,
2000.                                                   
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to our Registration Statement on Form S-3 filed
on October 24, 2000 (File No. 333-48536)              
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to our Report on Form 10-K filed on April 2,
2001.                                                    
|    
|    
|    
|    
|(10) |  | Incorporated by reference to our Report on Form 10-Q filed on May 15,
2001.                                                     
|    
|    
|    
|    
|(11) |  | Incorporated by reference to our Report on Form 10-K filed on April 1,
2002.