##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
   þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED
    MARCH 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD
    FROMTO          .   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
    Incorporation or Organization)

(IRS Employer
    Identification No.)   2450 WALSH AVENUE
 SANTA CLARA, CALIFORNIA 95051
 (408) 235-5500
 (Address, Including Zip Code,
    and Telephone Number, Including Area Code, of
 the Registrants Principal
    Executive Offices)
      o þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
  APPLICABLE
    ONLY TO CORPORATE ISSUERS:




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##### 



INDEX
  TERAYON
    COMMUNICATION SYSTEMS, INC.
  PageNo.PART I.
    FINANCIAL INFORMATIONItem 1.


Financial
    Statements


3Condensed
    Consolidated Balance Sheets as of March 31, 2006
    (unaudited) and December 31, 2005


3Condensed
    Consolidated Statements of Operations for the three months ended
    March 31, 2006 and 2005 (unaudited)


4Condensed
    Consolidated Statements of Cash Flows for the three months ended
    March 31, 2006 and 2005 (unaudited)


5Notes to Condensed
    Consolidated Financial Statements as of March 31, 2006
    (unaudited)


6Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


30Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


42Item 4.


Controls and
    Procedures


42PART II.
    OTHER INFORMATIONItem 1.


Legal
    Proceedings


48Item 1A.


Risk
    Factors


51Item 2.


Unregistered Sale
    of Equity Securities and Use of Proceeds


52Item 3.


Defaults Upon
    Senior Securities


52Item 4.


Submission of
    Matters to a Vote of Security Holders


52Item 5.


Other
    Information


52Item 6.


Exhibits


52EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Restatement
  Form 10-K Form 10-Q
   2




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##### Table of Contents



PART I.
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  TERAYON
    COMMUNICATION SYSTEMS, INC.
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 (in thousands, except for share data)
  March 31,


December 31,2006


2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
9,716


$
28,867Short-term investments


18,776



72,434Accounts receivable, net of
    allowance for doubtful accounts


9,679



9,879Other current receivables


1,310



1,606Inventory, net


9,277



10,915Deferred cost of goods sold


2,658



3,351Deposits


7,780



Other current assets


1,651



3,427Total current assets


60,847



130,479Property and equipment, net


3,557



3,915Long-term restricted cash


332



332Long-term deferred cost of goods
    sold


3,714



4,351Other assets, net


45



7,571Total assets

$
68,495


$
146,648LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
4,341


$
5,036Accrued payroll and related expenses


1,896



2,105Deferred revenues


10,920



13,952Deferred gain on asset sale


8,631



8,631Accrued warranty expenses


2,501



2,887Accrued restructuring and executive
    severance


996



1,305Accrued vendor cancellation charges


344



1,508Accrued other liabilities


5,439



6,287Interest payable






1,356Current portion of subordinated
    convertible notes






65,367Total current liabilities


35,068



108,434Long-term obligations


1,326



1,455Accrued restructuring and executive
    severance


1,218



1,381Long-term deferred revenue


13,095



14,721Total liabilities


50,707



125,991Stockholders equity:Preferred stock, $0.001 par value:
    5,000,000 shares authorized; no shares issued and outstanding






Common stock, $0.001 par value:
    200,000,000 shares authorized; 77,793,186 shares issued;
    77,637,177 shares outstanding


78



78Additional paid-in capital


1,087,609



1,086,817Accumulated deficit


(1,066,382
)


(1,062,438
)Treasury stock


(773
)


(773
)Accumulated other comprehensive loss


(2,744
)


(3,027
)Total stockholders equity


17,788



20,657Total liabilities and
    stockholders equity

$
68,495


$
146,648    3




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
  Three Months EndedMarch 31,2006


2005(as restated)Revenues

$
21,490


$
17,813Cost of goods sold


10,716



11,263Gross profit


10,774



6,550Operating expenses:Research and development


4,069



5,234Sales and marketing


5,184



5,674General and administrative


5,150



3,419Restructuring charges, executive
    severance and asset write-offs


34



1,282Total operating expenses


14,437



15,609Loss from operations


(3,663
)


(9,059
)Interest income (expense), net


301



(190
)Other income (expense), net


(553
)


66Loss before income tax expense


(3,915
)


(9,183
)Income tax expense


(29
)


(50
)Net loss

$
(3,944
)

$
(9,233
)Basic and diluted net loss per
    share

$
(0.05
)

$
(0.12
)Shares used in computing basic and
    diluted net loss per share


77,637



76,645    4




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
  Three Months EndedMarch 31,2006


2005(as restated)Cash flows from operating
    activities:Net loss

$
(3,944
)

$
(9,233
)Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities:Depreciation and amortization


487



941Stock-based compensation


792



Amortization of subordinated
    convertible notes premium


(286
)


(56
)Accretion of discounts on
    short-term investments


(126
)


Inventory provision


2,399



603Provision for doubtful accounts


50



(397
)Restructuring provision


34



1,141Write-off of fixed assets


41



546Warranty provision


149



(1,343
)Vendor cancellation provision


(1,040
)


(132
)Changes in operating assets and
    liabilities:Accounts receivable, net


446



905Inventory


(761
)


(2,279
)Other current assets


(5,311
)


(1,610
)Long-term deferred cost of goods
    sold


637



778Other assets


7,526



950Accounts payable


(695
)


432Accrued payroll and related
    expenses


(209
)


(992
)Deferred revenues


(4,658
)


14,625Accrued warranty expenses


(535
)


(187
)Accrued restructuring charges


(506
)


(1,742
)Accrued vendor cancellation charges


(124
)


(16
)Accrued other liabilities


(2,333
)


(1,248
)Net cash provided by (used in)
    operating activities


(7,967
)


1,686Cash flows from investing
    activities:Purchases of short-term investments






(14,926
)Proceeds from sales and maturities
    of short-term investments


54,033



(42
)Purchases of property and equipment


(170
)


(568
)Net cash provided by (used in)
    investing activities


53,863



(15,536
)Cash flows from financing
    activities:Debt extinguishment of convertible
    subordinated notes


(65,081
)


Proceeds from issuance of common
    stock






1,300Net cash provided by (used in)
    financing activities


(65,081
)


1,300Effect of foreign currency
    exchange rate changes


34



(31
)Net decrease in cash and cash
    equivalents


(19,151
)


(12,581
)Cash and cash equivalents at
    beginning of period


28,867



43,218Cash and cash equivalents at end
    of period

$
9,716


$
30,637Supplemental disclosures of cash
    flow information:Cash paid for income taxes

$
28


$
27Cash paid for interest

$
461


$
1,627    5




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
  1.
    Organization  Description
    of Business
        2.
    Restatement
    of Previously Issued Financial Statements  Form 10-K Form 10-K),
 6




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  EFFECTS
    OF THE RESTATEMENT
    March 31, 2005Cumulative Effect


CurrentAs Previously


of Prior Period


QuarterReported


Adjustments


Adjustments


As Restated


NotesASSETSCurrent assets:Cash and cash equivalents

$
30,637


$



$



$
30,637Short-term investments


69,180











69,180Accounts receivable, net of
    allowance for doubtful accounts


19,736



(1,101
)


(782
)


17,853



(a
)Other current receivables


1,242











1,242Inventory, net


18,611



522



437



19,342



(b
)E&O vendor cancellation










(228
)






(c
)Other current assets


1,634



1,474







5,126Short-term deferred cost of goods
    sold










2,018







(d
)Total current assets


141,040



895



1,445



143,380Property and equipment, net


4,840



94



1



4,935Restricted cash


8,817



(7,586
)






1,241Restricted cash 
    long-term reclass










10







(e
)Other assets, net


710



9,844







9,638Long-term deferred cost of goods
    sold










(777
)






(f
)License fee










(129
)






(g
)Restricted cash 
    long-term reclass










(10
)






(e
)Total assets

$
155,407


$
3,247


$
540


$
159,194LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
8,278


$
1


$
(1
)

$
8,278Accrued payroll and related expenses


3,601



557







3,601



(h
)Bonus accrual










(557
)






(i
)Deferred revenues


9,072



2,386







25,283Thomson direct development costs










(154
)






(j
)Short-term deferred revenue










13,979







(k
)Accrued warranty expenses


3,141



800







3,140Access Network Electronics










(801
)






(l
)Accrued restructuring and executive
    severance


3,092



(158
)






3,093



(m
)Restructuring reclass between
    short-term and long-term










159Accrued vendor cancellation charges


373











373Accrued other liabilities


4,031



(689
)






3,791



(h
)Legal accrual










449







(n
)Interest payable and current
    portion of capital lease obligations


542











542Total current liabilities


32,130



2,897



13,074



48,101Long-term obligations


1,725



(1
)






1,724Long-term deferred revenue






11,084



(5,693
)


5,391



(o
)Accrued restructuring and executive
    severance


1,772



158



(158
)


1,772



(m
)Convertible subordinated notes


65,081



507



(56
)


65,532



(p
)Total liabilities


100,708



14,645



7,167



122,520Stockholders equity:Preferred stock, $0.001 par
    value:Authorized sharesCommon stock, $0.001 par value:Authorized shares


77











77Additional paid-in capital


1,085,008



(2
)


2



1,085,008Accumulated deficit


(1,026,695
)


(11,396
)


(6,629
)


(1,044,720
)


(q
)Treasury stock, at cost


(773
)










(773
)Accumulated other comprehensive loss


(2,918
)










(2,918
)Total stockholders equity


54,699



(11,398
)


(6,627
)


36,674Total liabilities and
    stockholders equity

$
155,407


$
3,247


$
540


$
159,194  7




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Explanation
    of Current Quarterly Adjustments:
  (a)
    
    To reflect the cumulative effects of adjustments for
    transactions shipped
    free-on-board
    destination or with acceptance provisions and to adjust the
    allowance for doubtful accounts based on the Companys
    reassessment of the account.(b)
    
    To reflect the cumulative effects of adjustments for
    transactions shipped
    free-on-board
    destination or with acceptance provisions.(c)
    
    To reverse excess and obsolete (E&O) reserves related to
    CMTS product based on revised demand forecast available in March
    2005.(d)
    
    To reflect the cumulative effects of adjustments for the
    short-term portion of deferred cost of goods sold related to the
    change in revenue recognition policy to American Institute of
    Certified Public Accountants Statement of Position
    (SOP) 97-2,
    Software Revenue Recognition
    (SOP 97-2),
    Financial Accounting Statements Board (FASB), Emerging Issues
    Task Force
    (EITF) 00-21,
    Accounting for Revenue Arrangements with Multiple
    Deliverables
    (EITF 00-21),
    and
    SOP 81-1,
    Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts
    (SOP 81-1),
    and to reflect other adjustments when collectibility was not
    reasonably assured or when revenue and related costs were
    deferred for transactions shipped
    free-on-board
    destination or with acceptance provisions.(e)
    
    To reflect other adjustments and reclassifications.(f)
    
    To reflect the cumulative effects of adjustments for the
    long-term portion of deferred cost of goods sold related to the
    change in revenue recognition policy to
    SOP 97-2,
    EITF 00-21
    and
    SOP 81-1,
    and to reflect other adjustments when collectibility was not
    reasonably assured or when revenue and related costs were
    deferred for transactions shipped
    free-on-board
    destination or with acceptance provisions.(g)
    
    To correct pre-paid amortization on license fee based on a new
    royalty rate.(h)
    
    The cumulative amount was adjusted from the prior period to
    reflect the reclassification adjustment made after the filing of
    the original financial statements.(i)
    
    To accrue for retention and other miscellaneous bonuses earned
    by employees in 2004.(j)
    
    To defer direct development costs based on
    SOP 81-1
    until recognition of revenue at completion of contract. The
    costs were previously recognized in the period incurred.(k)
    
    To reflect the cumulative effects of adjustments for the
    short-term portion of deferred revenue related to the change in
    revenue recognition policy to
    SOP 97-2,
    EITF 00-21
    and
    SOP 81-1,
    and to reflect other adjustments when collectibility was not
    reasonably assured or when revenue and related costs were
    deferred for transactions shipped
    free-on-board
    destination or with acceptance provisions.(l)
    
    To reverse 2004 amortization of Access Network Electronics
    warranty reserve and to recognize in the quarter ended
    March 31, 2005.(m)
    
    To reflect short-term and long-term portion of restructuring
    liabilities.(n)
    
    To correct legal accrual adjustment recorded as of
    December 31, 2004 and to reflect the liability at
    March 31, 2005.(o)
    
    To reflect the cumulative effects of adjustments for the
    long-term portion of deferred revenue related to the change in
    revenue recognition policy to
    SOP 97-2,
    EITF 00-21
    and
    SOP 81-1,
    and to reflect other adjustments when collectibility was not
    reasonably assured or when revenue and related costs were
    deferred for transactions shipped
    free-on-board
    destination or with acceptance provisions.(p)
    
    To record amortization of bond premium to interest income.(q)
    
    To reflect cumulative effects of restatement adjustments on
    accumulated deficit. 8




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended March 31, 2005As Reported


Adjustments


As RestatedRevenues

$
26,363


$
(8,550
)

$
17,813Cost of goods sold


13,043



(1,780
)


11,263Gross profit


13,320



(6,770
)


6,550Operating expenses:Research and development


5,944



(710
)


5,234Sales and marketing


5,673



1



5,674General and administrative


2,795



624



3,419Restructuring charges, executive
    severance and asset write-offs


1,282







1,282Total operating expenses


15,694



(85
)


15,609Loss from operations


(2,374
)


(6,685
)


(9,059
)Interest (expense), net


(246
)


56



(190
)Other income, net


66







66Loss before income tax expense


(2,554
)


(6,629
)


(9,183
)Income tax expense


(50
)






(50
)Net loss

$
(2,604
)

$
(6,629
)

$
(9,233
)Basic and diluted net loss per
    share

$
(0.03
)





$
(0.12
)Shares used in computing basic and
    diluted net loss per share


76,738







76,645  9




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months EndedMarch 31,2005


NotesNet loss, as previously
    reported

$
(2,604
)Adjustments to net loss (increase)
    decrease:RevenuesDVS


(8,513
)


(a
)HAS


36



(b
)CMTS


(73
)


(b
)Cost of goods soldRevenue analysis (cost of goods
    sold)


1,337



(c
)Access Network Electronics


800



(d
)License fee


(129
)


(e
)E&O vendor cancellation


(228
)


(f
)Research and developmentBonus accrual


556



(g
)Thomson (other)


20



(h
)Thomson direct development costs


134



(i
)Sales and marketingReclass


(1
)


(j
)General and administrativeLegal accrual


(448
)


(k
)Bad debt expense


(176
)


(l
)Restructuring charges, executive
    severance and asset write-offsInterest income, netConvertible subordinated notes


56



(m
)Net loss, as restated

$
(9,233
)  10




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Explanation
    of Current Quarterly Adjustments:
  (a)
    
    To reflect adjustments to revenue related to the change in
    revenue recognition policy to
    SOP 97-2,
    SOP 81-1,
    Staff Accounting Bulletin (SAB) No. 104 (SAB 104), and
    EITF 00-21.   (b)
    
    To reflect adjustments for timing difference identified between
    deferred revenue and revenue for product sales when the fee was
    not fixed or determinable or when collectibility was not
    reasonably assured and to reflect other adjustments to the
    account.(c)
    
    To reflect adjustments to cost of goods sold related to the
    change in revenue recognition policy to
    SOP 97-2,
    EITF 00-21
    and
    SOP 81-1,
    and to reflect other adjustments for product sales when the fee
    was not fixed or determinable or when collectibility was not
    reasonably assured.(d)
    
    To reverse 2004 amortization of Access Network Electronics
    warranty reserve and to recognize in the quarter ended
    March 31, 2005.(e)
    
    To correct pre-paid amortization on license fee based on a new
    royalty rate.(f)
    
    To reverse E&O reserves related to CMTS product based on
    revised demand forecast available in March 2005.(g)
    
    To reverse expenses for retention and other miscellaneous
    bonuses earned by employees in 2004.(h)
    
    To defer cost of goods sold costs based on
    SOP 81-1
    until recognition of revenue at completion of contract. The
    costs were previously recognized in the period incurred.(i)
    
    To defer direct development costs based on
    SOP 81-1
    until recognition of revenue at completion of contract. The
    costs were previously recognized in the period incurred.(j)
    
    To reflect other adjustments and reclassifications.(k)
    
    To correct legal accrual adjustment recorded as of
    December 31, 2004 and to reflect the liability for the
    quarter ended March 31, 2005.(l)
    
    To reflect adjustments to the allowance for doubtful accounts
    and bad debt expense based on the Companys reassessment of
    the accounts.(m)
    
    To record amortization of bond premium to interest income. 11




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
  Form 10-Q Regulation S-X.
  Form 10-K,
  Basis
    of Consolidation
    Use of
    Estimates
    Fair
    Value of Financial Instruments
    Revenue
    Recognition
  free-on-board
 12




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    97-2, (SOP 97-2), SOP 81-1, (SOP 81-1).
  SOP 97-2,
  SOP 97-2.
  Deferred
    Revenue, Deferred Cost of Goods Sold
  SOP 97-2,
  Stock-Based
    Compensation
   13




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  first-in,
        Allowance
    for Doubtful Accounts
   14




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Inventory
  (first-in,
  March 31,


December 31,2006


2005(unaudited)Raw materials

$
168


$
58Work-in-process and finished goods


9,109



10,857Total

$
9,277


$
10,915   Purchase
    Obligations
    Net
    Loss Per Share
    Three Months EndedMarch 31,2006


2005(as restated)Net loss

$
(3,944
)

$
(9,233
)Basic and diluted net loss per
    share

$
(0.05
)

$
(0.12
)Shares used in computing basic and
    diluted net loss per share


77,637



76,645     Comprehensive
    Loss
   15




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months EndedMarch 31,2006


2005(as restated)Net income (loss)

$
(3,944
)

$
(9,233
)Change in cumulative translation
    adjustments, net


34



(31
)Change in unrealized gain (loss)
    on
    available-for-sale
    investments, net


249



(305
)Total comprehensive loss

$
(3,661
)

$
(9,569
)     March 31,


December 31,2006


2005(unaudited)Cumulative translation
    adjustments, net

$
(2,520
)

$
(2,554
)Unrealized gain (loss) on
    available-for-sale
    investments, net


(224
)


(473
)Total accumulated other
    comprehensive loss

$
(2,744
)

$
(3,027
)   Impact
    of Recently Issued Accounting Standards
       16




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        4.
    Contingencies  Litigation
  In re Terayon
    Communication Systems, Inc. Securities Litigation.
 17




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Bertram v. Terayon Communication Systems, Inc.
  Campbell v. Rakib In re Terayon Communication
    Systems, Inc. Derivative Litigation
  Form 10-K
   18




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         19




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        and/or
   20




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            5.
    Employee
    Equity Incentive Plans  Stock
    Option Program Description
     21




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      General
    Option Information
    Options OutstandingOptions





WeightedAvailable


Number of


Averagefor Grant


Shares


Exercise PriceDecember 31, 2005


5,530,925



13,031,986


$
4.78Authorized


3,000,000







Granted


(577,000
)


577,000



2.05Exercised










Cancelled


756,412



(756,412
)


4.29March 31, 2006


8,710,337



12,852,574


$
4.68   Valuation
    and Expense Information under SFAS 123(R)
   22




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three MonthsEndedMarch 31, 2006Cost of goods sold

$
84Research and development


176Sales and marketing


327General and administrative


205Share-based compensation effect in
    income before taxes


792Income taxes


Net share-based compensation
    effect in net loss

$
792Impact on net loss per share:Basic and diluted

$
0.01Shares outstanding


77,637       Three MonthsEndedMarch 31, 2005(as restated)Net loss, as reported

$
(9,233
)Less: total share-based employee
    compensation determined under the fair value method recognition
    provisions of SFAS 123 for all awards, net of tax


1,316Pro forma net loss

$
(10,549
)Reported basic and diluted net
    loss per share

$
(0.12
)Pro forma basic and diluted net
    loss per share

$
(0.14
)Shares used in computing pro forma
    basic and diluted net loss per share


76,645    23




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended March 31,2006


2005(as restated)Weighted average estimated fair
    value of grant

$
0.90


$
1.77Expected life (in years)


2.2



5.0Risk-free interest rate


4.4
%


4.1
%Volatility


72.6
%


69.9
%Dividend yield



%



%       WeightedAverageWeighted


Remaining


AggregateNumber of


Average


Contractual


IntrinsicShares


Exercise Price


Life (in years)


Value(1)Vested


8,453,579


$
5.76



6.0


$
138,609Expected to vest


3,669,409



2.61



6.8



115,240Total


12,122,988



4.80



6.2


$
253,849     (1)
    
    These amounts represent the differences between the exercise
    price and $1.83, the closing price of the Companys stock
    on March 31, 2006 as reported on The NASDAQ National
    Market, for all
    in-the-money
    options outstanding.  6.
    Operating
    Segment Information    Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)Revenues by product:DVS

$
14,824


$
4,533


$
10,291



227.0
%HAS


4,953



11,701



(6,748
)


(57.7
)%CMTS


1,713



1,579



134



8.5
%Total

$
21,490


$
17,813


$
3,677



20.6
%  24




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)Revenues:United States

$
14,416


$
8,668


$
5,748



66.3
%Americas, excluding United States


782



321



461



143.6
%Europe, Middle East and Africa
    (EMEA), excluding Israel


3,659



4,327



(668
)


(15.4
)%Israel


653



1,285



(632
)


(49.2
)%Asia, excluding Japan


1,606



2,923



(1,317
)


(45.1
)%Japan


374



289



85



29.4
%Total

$
21,490


$
17,813


$
3,677



20.6
%       7.
    Restructuring
    Charges and Asset Write-offs  Restructuring
  ,
  2004
    Restructurings
   25




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Excess Leased


Aircraft LeaseFacilities


Termination


TotalBalance at December 31, 2005

$
2,053


$
498


$
2,551Cash payments


(284
)


(87
)


(371
)Changes in estimate


105



(71
)


34Balance at March 31, 2006

$
1,874


$
340


$
2,214   2001
    Restructuring
    Asset
    Write-offs
    8.
    Product
    Warranty   26




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  9.
    Sale of
    Certain Assets    10.
    Convertible
    Subordinated Notes  Form 10-Q Form 10-Q
  11.
    Subsequent
    Events  Delisting
    by The NASDAQ Stock Market
  Form 10-Q
 27




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    over-the-counter
  Reliance
    Settlement
    Changes
    in Membership and Reduction in Size of the Board of
    Directors
    Commitments
    and Obligations
   28




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##### Table of Contents



TERAYON
    COMMUNICATION SYSTEMS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Settlement
    of Derivative Lawsuit
  In re Terayon
    Communication Systems, Inc. Derivative Litigation,
 29




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Forward-Looking
    Statements
  Form 10-Q Form 10-K Form 10-K).
  Executive
    Overview
  ® digital-to-analog line-ups,
   30




---



##### Table of Contents



Form 10-Q Form 10-K.
  Critical
    Accounting Policies and Estimates
    10-K.
  Revenue
    Recognition
  free-on-board
   31




---



##### Table of Contents



97-2, (SOP 97-2), SOP 81-1, (SOP 81-1).
  SOP 97-2,
    Deferred
    Revenue, Deferred Cost of Goods Sold
  SOP 97-2. SOP 97-2,
  Stock-Based
    Compensation
    first-in,
   32




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##### Table of Contents



Allowance
    for Doubtful Accounts
    Results
    of Operations
  Comparison
    of Three Months Ended March 31, 2006 and March 31,
    2005 (as restated)
  Revenues
   33




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##### Table of Contents



Revenues
    by Groups of Similar Products
    Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)Revenues by product:DVS

$
14,824


$
4,533


$
10,291



227.0
%HAS


4,953



11,701



(6,748
)


(57.7
)%CMTS


1,713



1,579



134



8.5
%Total

$
21,490


$
17,813


$
3,677



20.6
%         Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)DVS product revenue invoiced and
    recognized in current period:Total invoiced in current period

$
9.5


$
13.1


$
(3.6
)


(27.5
)%Less: Invoiced in current period
    and recognized in future periods


1.1



10.8



(9.7
)


(89.8
)%Total invoiced and recognized in
    current period

$
8.4


$
2.3


$
6.1



265.2
%DVS product revenue invoiced in
    prior fiscal years and recognized in current period

$
6.4


$
2.2


$
4.2



190.9
%Total DVS product revenue
    recognized in current period

$
14.8


$
4.5


$
10.3



227.0
%    34




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##### Table of Contents



Revenues
    by Geographic Region
    Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)Revenues:United States

$
14,416


$
8,668


$
5,748



66.3
%Americas, excluding United States


782



321



461



143.6
%Europe, Middle East and Africa
    (EMEA), excluding Israel


3,659



4,327



(668
)


(15.4
)%Israel


653



1,285



(632
)


(49.2
)%Asia, excluding Japan


1,606



2,923



(1,317
)


(45.1
)%Japan


374



289



85



29.4
%Total

$
21,490


$
17,813


$
3,677



20.6
%         Cost of
    Goods Sold and Gross Profit
   35




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##### Table of Contents



Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)DVS product cost of goods sold
    invoiced and recognized in current period:Total invoiced in current period

$
2.2


$
2.4


$
(0.2
)


(8.3
)%Less: Invoiced in current period
    and recognized in future periods






1.9



(1.9
)


(100.0
)%Total invoiced and recognized in
    current period

$
2.2


$
0.5


$
1.7



340.0
%DVS product cost of goods sold
    invoiced in prior fiscal years and recognized in current period

$
1.4


$
0.5


$
0.9



180.0
%Total DVS product cost of goods
    sold recognized in current period

$
3.6


$
1.0


$
2.6



260.0
%   SOP 97-2
     36




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##### Table of Contents



Operating
    Expenses
    Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)Research and development

$
4,069


$
5,234


$
(1,165
)


(22.3
)%Sales and marketing


5,184



5,674



(490
)


(8.6
)%General and administrative


5,150



3,419



1,731



50.6
%Restructuring charges, executive
    severance and asset write-offs


34



1,282



(1,248
)


(97.3
)%   Research and Development.
  Sales and Marketing.
  General and Administrative.
   37




---



##### Table of Contents



Restructuring Charges, Executive Severance and Asset
    Write-offs.
    Non-operating
    Expenses
    Three Months EndedMarch 31,


Variance in


Variance in2006


2005


Dollars


Percent(as restated)


(as restated)


(as restated)Interest income (expense), net

$
301


$
(190
)

$
491



258.4
%Other income (expense), net


(553
)


66



(619
)


(937.9
)%       Income
    Tax Expense
    Stock-Based
    Compensation
         38




---



##### Table of Contents



Litigation
    Off-Balance
    Sheet Financings and Liabilities
    Liquidity
    and Capital Resources
    Form 10-Q Form 10-Q
       39




---



##### Table of Contents



Form 10-Q Form 10-K.
  Contractual
    Obligations
    Payments Due by PeriodLess than


1-3


4-5


After 5Total


1 Year


Years


Years


YearsUnconditional purchase obligations

$
4.9


$
4.9


$



$



$
Operating lease obligations


11.4



3.4



6.2



1.8



Aircraft lease obligations


1.2



1.2











Total

$
17.5


$
9.5


$
6.2


$
1.8


$
       Amount of Commitment Expiration per PeriodLess than


1-3


4-5


After 5Total


1 Year


Years


Years


YearsDeposits

$
7.6


$
7.6


$



$



$
Standby letters of credit


0.5



0.2







0.3



Total

$
8.1


$
7.8


$



$
0.3


$
  40




---



##### Table of Contents



Impact of
    Recently Issued Accounting Standards
           41




---



##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest Rate Risk. available-for-sale
  Foreign Currency Risk.
  Item 4.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
    Form 10-Q Form 10-K Form 10-K) Form 10-K Form 10-Q, Form 10-Q.
 42




---



##### Table of Contents



Form 10-K,
  
    insufficient controls related to the identification, capture and
    timely communication of financially significant information
    between certain parts of the organization and the accounting and
    finance department to enable these departments to account for
    transactions in a complete and timely manner;
    lack of sufficient personnel with technical accounting expertise
    in the accounting and finance department and inadequate review
    and approval procedures to prepare external financial statements
    in accordance with GAAP;
    failure in identifying the proper recognition of revenue in
    accordance with GAAP, including revenue recognized in accordance
    with Statement of Position (SOP)
    97-2,
    Software Revenue Recognition
    (SOP 97-2),
    Staff Accounting Bulletin (SAB) No. 101, Revenue
    Recognition (SAB 101), as amended by
    SAB No. 104 (SAB 104),
    SOP 81-1,
    Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts
    (SOP 81-1),
    Financial Accounting Standards Board, Emerging Issues Task Force
    (EITF)
    00-21,
    Accounting for Revenue Arrangements with Multiple
    Deliverables (EITF
    00-21);
    the use of estimates, including monitoring and adjusting
    balances related to certain accruals and reserves, including
    allowance for doubtful accounts, legal charges, license fees,
    restructuring charges, taxes, warranty obligations and fixed
    assets;
    lack of sufficient analysis and documentation of the application
    of GAAP; and
    ineffective controls over the documentation, authorization and
    review of manual journal entries and ineffective controls to
    ensure the accuracy and completeness of certain general ledger
    account reconciliations conducted in connection with period end
    financial reporting.    Changes
    in Internal Control over Financial Reporting
  Form 10-Q
   43




---



##### Table of Contents




    insufficient controls related to the identification, capture and
    timely communication of financially significant information
    between certain parts of the organization and the accounting and
    finance department to enable these departments to account for
    transactions in a complete and timely manner; and
    lack of sufficient personnel with technical accounting expertise
    in the accounting and finance department and inadequate review
    and approval procedures to prepare external financial statements
    in accordance with GAAP.  Detailed
    Discussion of Material Weaknesses
    Revenue Recognition. SOP 97-2, 00-21. SOP 81-1
  
    The Company acquired its video products as part of acquisitions
    completed by the Company in 1999 and 2000, and at that time
    determined that the products would be accounted for under
    SAB 101, as amended by SAB 104. The Company did not
    sufficiently evaluate its video products and continued to
    account for its video products in accordance with SAB 104 when
    revenue on the video products should have been accounted for in
    accordance with the software revenue recognition principles
    under
    SOP 97-2.
    Additionally, the Company sold maintenance support contracts
    that included software upgrades with its video products and did
    not establish vendor specific objective evidence (VSOE) of fair
    value on the pricing of such maintenance contracts in accordance
    with
    SOP 97-2,
    SAB 104 and EITF
    00-21.
    Because the Company continued to account for the video products
    and maintenance sold with the video products under SAB 104,
    the Company did not take the steps necessary to establish VSOE
    of fair value on the pricing of its maintenance products and
    revenue was recognized during incorrect periods.
    The Company did not properly account for a significant
    transaction whereby it developed a broadcast platform based on
    its DM 6400 product to sell to its customer Thomson
    Broadcast (Thomson) in accordance with project accounting under
    SOP 81-1,
    SAB 104 and EITF
    00-21. The
    Company entered into an agreement with Thomson in December 2003
    where it agreed to develop a statistical remultiplexing product
    that would include certain features and functionality
    (BP 5100) agreed upon by the parties, as well as
    maintenance of the products purchased by Thomson for a period of
    one year. In September 2004, Thomson accepted the BP 5100
    and the Company recognized revenue on the products sold through
    September 2004 and the maintenance provided through September
    2004. In December 2004, the Company recognized revenue on the
    BP 5100s sold to Thomson and the maintenance provided to
    Thomson in the quarter ended December 31, 2004. In December
    2004, the Company extended its agreement with Thomson by
    agreeing to develop an additional software release containing
    additional features and functionality that were not developed
    under the original agreement and 44




---



##### Table of Contents



providing product maintenance for an additional period of one
    year. The Company should have accounted for the transaction as a
    multiple element arrangement under
    SOP 97-2
    and adopted the completed contract recognition criteria under
    SOP 81-1,
    which would have required the Company to delay recognizing
    revenue under its agreement with Thomson until December 2005
    when the Company completed its deliverables under the agreement.  
    The Company incorrectly recorded deferred revenue and cost of
    goods sold on the balance sheet for certain transactions. As a
    result of the Companys focus on revenue recognition more
    generally as described above, the Company identified specific
    invoices for which deferred revenue for these sales had been
    recognized but the criteria for revenue recognition had not been
    met, including the criteria that delivery or performance had
    occurred, the fees were fixed or determinable or that
    collectibility was reasonably assured. Accordingly, the Company
    corrected these errors in deferred revenue, deferred cost of
    goods sold, inventory and accounts receivable accounts and
    recognized revenue when title transferred or customer payments
    were reasonably assured and all criteria for revenue recognition
    were met.  The Use of Estimates.
  
    The Company did not effectively monitor and adjust reserves
    related to its restructuring charges. In 2001, the Company
    restructured a portion of its leased facilities in Israel. The
    Company did not sufficiently review its restructuring charges to
    account for its rental of the restructured facilities such that
    at one point, the restructuring reserve exceeded the amount of
    rent due under the lease.
    The Company over accrued reserves related to the payment of
    legal fees, taxes and other liabilities owed to third party
    vendors. The Company did not have controls in place to
    accurately estimate the accruals.
    The Company used the wrong methodology to account for a prepaid
    license fee associated with the research and development of one
    of its product lines. The Company prepaid a license fee of
    $2.0 million to license technology to incorporate into the
    semiconductor chip used in its cable modem and eMTA products.
    Additionally, as part of the license agreement, the Company was
    required to pay a royalty of $1.00 per semiconductor chip
    sold to a third party. When the Company selected the method of
    amortization to be applied to the $2.0 million license fee,
    the Company opted to amortize $1.00 per chip for each chip
    utilized in the modem and eMTA products based on the third party
    rate established in the license agreement. However, the Company
    amortized the $2.0 million over the production of the
    semiconductor chips and not the sale of the modem and eMTA
    products containing the semiconductor chips. In hindsight, the
    Company should have used the useful life method, which resulted
    in quarterly adjustments as the royalty of $1.00 was overstated.
    The Company did not properly account for warranty obligations
    related to the sale of certain assets. In July 2003, the Company
    sold certain assets related to one of its products to a third
    party. Under the terms of the sale, the Company agreed to assume
    up to $1.0 million warranty obligation on the product
    related to the complaint of one customer. The Company recorded
    the $1.0 million as an accrued warranty liability. The
    Company amortized $0.8 million of the $1.0 million
    obligation during 2004. However, during the course of the
    restatement, the Company determined that the obligation should
    not have been relieved unless either there was other actual
    expenses incurred in connection with the obligation or upon the
    actual expiration of the warranty. Since the Company did not
    incur any expenses in connection with this obligation, the
    Company corrected this error by increasing the accrual $0.2
    million in each quarter of 2004. Accordingly, the warranty
    obligation of $1.0 million was relieved at March 31,
    2005 at the expiration of the warranty term.  Qualified Accounting Personnel.
 45




---



##### Table of Contents



Inadequate
    Controls over Documentation and Record Keeping.
  
    The Company did not have sufficient controls to address the
    amendment of sales orders with its customers. Sales orders could
    be amended through the amendment of the sales orders, purchase
    orders and agreements. When sales were amended through sales or
    purchase orders, the person processing the amendments would
    exercise discretion in inputting the revised terms and
    conditions and there was no consistent policy requiring the
    accounting and finance department to approve such amendments or
    even informing the accounting and finance department of such
    amendments.
    The Company did not retain certain corporate records in
    conjunction with the sale of certain subsidiaries to third
    parties.
    The Company did not have sufficient controls in place to ensure
    the proper authorization and review of manual journal entries
    and the associated support documentation. Additionally, the
    Company did not keep adequate documentation related to the
    reconciliation of certain general ledger accounts.  Remediation
    Steps to Address Material Weaknesses
  Form 10-Q,
  Communication
    of Financial Information.
  
    During the quarter ended June 30, 2005, the Company established
    procedures to document the review of press releases to account
    for transactions in a complete and timely manner.
    During the quarter ended June 30, 2005, the Company also
    improved the internal process of drafting and reviewing periodic
    reports by implementing additional management and external legal
    counsel review prior to their submission to the Companys
    independent registered public accounting firm.
    Continue to monitor the communication channels between our
    senior management and our finance department and take prompt
    action, as necessary, to further strengthen these communication
    channels;
    Increase staffing in the finance department;
    Re-allocate duties to persons within the finance organization to
    maximize their skills and experience;
    Implement training procedures for new employees and/or
    consultants in the finance department on our disclosure
    procedures and controls, our Company and our actions in previous
    reporting periods; and
    Take steps to ensure that our senior management has timely
    access to all material financial and non-financial information
    concerning our business.  Revenue
    Recognition.
  
    During the first three quarters of 2006, the Companys
    finance and accounting department, with the assistance of
    outside consultants, implemented procedures to recognize sales
    of its video products under the software accounting rules under
    SOP 97-2
    in accordance with GAAP.
    In 2006, the Company established pricing guidelines and internal
    procedures to ensure consistent pricing to allow for the
    establishment of VSOE of fair value for sales made with multiple
    element arrangements.
    During the second and third quarters of 2005, the accounting and
    finance department established procedures surrounding the
    month-end close process to ensure that the information and
    estimates necessary for recognizing revenue in accordance with
    SOP 97-2
    were available. 46




---



##### Table of Contents




    The Company will provide its accounting staff with training on
    revenue recognition, including software accounting and project
    accounting, and GAAP, including attending seminars and
    conferences. Additional training will be provided on a regular
    and periodic basis and updated as considered necessary.
    During the quarter ended March 31, 2006, the Company hired
    an experienced revenue accountant to review all revenue
    transactions and to ensure that revenues, cost of goods sold,
    deferred revenue and deferred cost of goods sold are properly
    accounted for in accordance with GAAP and the Companys
    policies.  Use of
    Estimates.
  
    The Company has engaged the services of experienced accounting
    consultants to review the Companys books and close
    procedures on a monthly basis to assist management in ensuring
    that the Companys financial statements are being recorded
    in accordance with GAAP.
    The Company continues to engage the services of an outside tax
    accounting firm to assist with the calculation of the
    Companys tax liabilities.
    During the quarter ended September 30, 2006, the Company
    established a process where all significant accruals must be
    reviewed and approved by the Corporate Controller.
    During the quarter ended June 30, 2006, the Company
    implemented a process to obtain and assess accruals for legal
    costs and expenses owed to third party vendors whereby the
    Companys legal department obtains monthly estimates from
    the third party vendors and reviews the amount reported by third
    party vendors for accuracy.  Accounting
    Personnel.
  
    During the quarter ended June 30, 2006, the Company engaged
    experienced accounting consultants to act as the
    VP Finance, Corporate Controller and Revenue Recognition
    Accountant.
    During the second, third and fourth quarters of 2006, the
    Company engaged expert accounting consultants to assist the
    Companys accounting and finance department with the
    management and implementation of controls surrounding revenue
    recognition, the administration of existing controls and
    procedures, the preparation of the Companys periodic
    reports and the documentation of complex accounting transactions.
    The Company continues to take steps to recruit additional
    qualified senior accounting personnel, including certified
    public accountants personnel with recent public accounting firm
    experience.  Record
    Keeping and Documentation.
  
    During the quarter ended March 31, 2007, the Companys
    employees involved in order entry will receive training
    regarding the controls and procedures surrounding the amendment
    of sales orders. Additional training will be provided on a
    regular and periodic basis and updated as necessary to reflect
    any changes in the Companys or its customers
    business practices or activities.
    During the quarter ended June 30, 2006, the Company entered
    into agreements with third parties that purchased assets from
    the Company in Israel. These agreements provide the Company with
    access to the corporate records and require the third parties to
    retain documents in accordance with Israeli law.
    The Company has adopted a policy requiring it to retain a copy
    of all corporate records in connection with dispositions of
    assets to third parties.
    The Company has established policies and procedures for the
    review and approvals of all manual journal entries.
    Improving the review process that occurs prior to providing the
    initial draft of the periodic report to our independent auditors
    for review. 47




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
    The Company has developed monthly close schedules which include
    the timeline for completion and approval of reconciliations by
    the Corporate Controller.  Subsequent
    Changes in Internal Control over Financial Reporting
   PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings  In re Terayon Communication Systems,
    Inc. Securities Litigation.
  Bertram v. Terayon
    Communication Systems, Inc.
  Campbell v. Rakib In re
    Terayon
 48




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##### Table of Contents



Communication Systems, Inc. Derivative Litigation
  Form 10-K
       49




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and/or
 50




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##### Table of Contents



Item 1A.
    Risk
    Factors  The reader should carefully consider, in connection with the
    other information in this report, the factors discussed in
    Part I, Item 1A  Risk Factors on pages 20
    through 42 of our Annual Report on
    Form 10-K
    for the year ended December 31, 2005 (2005
    Form 10-K).
    These factors could cause our actual results to differ
    materially from those stated in forward-looking statements
    contained in this document and elsewhere. In addition to the
    factors included in the 2005
    Form 10-K,
    the reader should also consider the following risk factor:
  Our quarterly results of operations are subject to
    significant fluctuations and do not necessarily predict future
    operating results.
  quarter-to-quarter quarter-to-quarter
 51




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##### Table of Contents



Form 10-K quarter-to-quarter.
  Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds    Item 3.
    Defaults
    Upon Senior Securities  Form 10-Q Form 8-K
  Item 4.
    Submission
    of Matters to a Vote of Security Holders    Item 5.
    Other
    Information    Item 6.
    Exhibits  ExhibitNumber

Exhibit Description3
.1

Amended and Restated Certificate
    of Incorporation of Terayon Communication Systems, Inc.(5)3
.2

Bylaws of Terayon Communication
    Systems, Inc.(5)3
.3

Certificate of Amendment to
    Amended and Restated Certificate of Incorporation of Terayon
    Communication Systems, Inc.(5)3
.4

Certificate of Designation of
    Series A Junior Participating Preferred Stock.(4)4
.1

Specimen Common Stock
    Certificate.(2)4
.2

Amended and Restated Information
    and Registration Rights Agreement, dated April 6, 1998.(1)4
.3

Form of Security for Terayon
    Communication Systems, Inc.s 5% Convertible
    Subordinated Notes due August 1, 2007.(3)4
.4

Registration Rights Agreement,
    dated July 26, 2000, among Terayon Communication Systems,
    Inc. and Deutsche Bank Securities, Inc. and Lehman Brothers,
    Inc.(3)4
.5

Indenture, dated July 26,
    2000, between Terayon Communication Systems, Inc. and State
    Street Bank and Trust Company of California, N.A.(3)4
.6

Rights Agreement, dated
    February 6, 2001, between Terayon Communication Systems,
    Inc. and Fleet National Bank.(4)10
.27

Lease, dated August 9, 2006
    between Sobrato Development Companies #871 and Terayon
    Communication Systems, Inc.(6)10
.28

Triple-Net
    Sub-Sublease
    Agreement, effective August 9, 2006, as amended, between
    Terayon Communication Systems, Inc. and Citrix Systems, Inc.(6)10
.31

Amendment No. 1 to the
    Terayon Communication Systems, Inc. 1997 Equity Incentive
    Plan.(6)10
.32

Non-Employee Director Equity
    Compensation Policy.(6)10
.33

Non-Employee Director Equity
    Compensation Policy Nonstatutory Stock Option Agreement.(6)10
.34

2006 Executive Sales Commission
    Plan.(6)10
.35

2006 Section 16 Executive
    Officer Bonus Plan.(6) 52




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ExhibitNumber

Exhibit Description31
.1

Certification of the Chief
    Executive Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of the Chief
    Financial Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of the Chief
    Executive Officer Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.32
.2

Certification of the Chief
    Financial Officer Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.     (1)
    
    Incorporated by reference to exhibits to our Registration
    Statement on
    Form S-1
    filed on June 16, 1998 (File
    No. 333-56911).(2)
    
    Incorporated by reference to exhibits to our Registration
    Statement on
    Form S-1/A
    filed on July 31, 1998 (File
    No. 333-56911).(3)
    
    Incorporated by reference to our Registration Statement on
    Form S-3
    filed on October 24, 2000 (File
    No. 333-48536).(4)
    
    Incorporated by reference to our Report on
    Form 8-K
    filed on February 9, 2001.(5)
    
    Incorporated by reference to our Report on
    Form 8-K
    filed on November 21, 2003.(6)
    
    Incorporated by reference to our Report on
    Form 10-K
    filed on December 29, 2006. 53




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SIGNATURES
      By:
    /s/  Mark
    A. Richman      54




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##### Table of Contents



EXHIBIT
    INDEX
  ExhibitNumber

Exhibit Description3
.1

Amended and Restated Certificate
    of Incorporation of Terayon Communication Systems, Inc.(5)3
.2

Bylaws of Terayon Communication
    Systems, Inc.(5)3
.3

Certificate of Amendment to
    Amended and Restated Certificate of Incorporation of Terayon
    Communication Systems, Inc.(5)3
.4

Certificate of Designation of
    Series A Junior Participating Preferred Stock.(4)4
.1

Specimen Common Stock
    Certificate.(2)4
.2

Amended and Restated Information
    and Registration Rights Agreement, dated April 6, 1998.(1)4
.3

Form of Security for Terayon
    Communication Systems, Inc.s 5% Convertible
    Subordinated Notes due August 1, 2007.(3)4
.4

Registration Rights Agreement,
    dated July 26, 2000, among Terayon Communication Systems,
    Inc. and Deutsche Bank Securities, Inc. and Lehman Brothers,
    Inc.(3)4
.5

Indenture, dated July 26,
    2000, between Terayon Communication Systems, Inc. and State
    Street Bank and Trust Company of California, N.A.(3)4
.6

Rights Agreement, dated
    February 6, 2001, between Terayon Communication Systems,
    Inc. and Fleet National Bank.(4)10
.27

Lease, dated August 9, 2006
    between Sobrato Development Companies #871 and Terayon
    Communication Systems, Inc.(6)10
.28

Triple-Net
    Sub-Sublease
    Agreement, effective August 9, 2006, as amended, between
    Terayon Communication Systems, Inc. and Citrix Systems, Inc.(6)10
.31

Amendment No. 1 to the
    Terayon Communication Systems, Inc. 1997 Equity Incentive
    Plan.(6)10
.32

Non-Employee Director Equity
    Compensation Policy.(6)10
.33

Non-Employee Director Equity
    Compensation Policy Nonstatutory Stock Option Agreement.(6)10
.34

2006 Executive Sales Commission
    Plan.(6)10
.35

2006 Section 16 Executive
    Officer Bonus Plan.(6)31
.1

Certification of the Chief
    Executive Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of the Chief
    Financial Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of the Chief
    Executive Officer Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.32
.2

Certification of the Chief
    Financial Officer Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.     (1)
    
    Incorporated by reference to exhibits to our Registration
    Statement on
    Form S-1
    filed on June 16, 1998 (File
    No. 333-56911).(2)
    
    Incorporated by reference to exhibits to our Registration
    Statement on
    Form S-1/A
    filed on July 31, 1998 (File
    No. 333-56911).(3)
    
    Incorporated by reference to our Registration Statement on
    Form S-3
    filed on October 24, 2000 (File
    No. 333-48536).(4)
    
    Incorporated by reference to our Report on
    Form 8-K
    filed on February 9, 2001.(5)
    
    Incorporated by reference to our Report on
    Form 8-K
    filed on November 21, 2003.(6)
    
    Incorporated by reference to our Report on
    Form 10-K
    filed on December 29, 2006.