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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 000-24647

Terayon Communication Systems, Inc.

2952 Bunker Hill Lane

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

      The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 28, 2002 as reported on the Nasdaq National Market, was approximately $471,647,933. Shares of Common Stock held by each officer and director and by each person known to the Company who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      As of March 28, 2002, registrant had outstanding 72,701,056 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission in May 2002, pursuant to Section 14 of the Securities Exchange Act of 1934, in connection with the 2001 Annual Meeting of Stockholders of Terayon Communication Systems, incorporated: Part III.

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Special Note on Forward-Looking Statements

      This report on Form 10-K contains forward-looking statements 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. These 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 Item 7 of this Report on Form 10-K, among other things, should be considered in evaluating our prospects and future financial performance.

PART I

Item 1.     Business

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.

      Driving the demand in our market (broadband equipment) is the proliferation of broadband services delivered by cable television operators, telecommunication carriers and satellite network operators. As operators and carriers add new residential and business subscribers for broadband services, they must deploy Customer Premise Equipment (CPE) such as cable and Digital Subscriber Line (DSL) modems and install corresponding equipment such as Cable Modem Termination Systems (CMTS), DSL Access Multiplexers (DSLAM) and video headends in their networks to operate the CPE.

      Worldwide demand for broadband services is growing rapidly. This demand has been driven by residential and commercial users who are accessing networks for a variety of data, video and voice applications, including high-speed Internet access, electronic commerce, online gaming, file sharing, telecommuting, interactive television and telephone services. Research firm Kinetic Strategies estimates that in North America alone, residential broadband Internet subscribers more than doubled in 2001 to 13.3 million. Dell’Oro Group estimates that worldwide cable modem and DSL subscribers will increase from 31 million at the end of 2001 to 178 million in 2006.

      Corresponding with the anticipated growth of subscribers for broadband services is an increased need for modems at the subscriber’s premise, and CMTSs, DSLAMs and video headends by operators and carriers. Dell’Oro estimates that the worldwide market for broadband cable equipment will reach $2.8 billion in 2006, up from $1.4 billion in 2001. Furthermore, Dell’Oro estimates that the worldwide market for broadband DSL equipment will reach $8 billion in 2006, up from $5.4 billion in 2001.

Business

      We are an experienced and focused partner for broadband service providers. Our mission is 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.

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      We are structured around the following operating segments: Cable Broadband Access Systems (Cable) and Telecom Carrier Systems (Telecom). Currently, 88% of our revenues are derived from Cable and 12% from Telecom. We believe Cable will continue to generate the vast majority of our revenues in the foreseeable future. See Note 11 in our Notes to Consolidated Financial Statements contained in Item 8 for financial information on Cable and Telecom.

      In 2001, we experienced significant changes in our company structure. As a result of our decision to suspend certain product lines and product development efforts during 2001, intangible assets totaling $572.8 million relating to certain acquisitions were written-off. In addition, we incurred restructuring and other charges in the amount of $14.3 million relating to employment termination costs and consolidation of facilities. In order to reduce our indebtedness, we repurchased approximately $325.9 million of Convertible Subordinated Notes issued in July 2000, resulting in an extraordinary gain of approximately $185.3 million net of unamortized issuance costs.

      We were incorporated in California in 1993, reincorporated in Delaware in 1998 and have been a publicly traded company since 1998.

Business Strategy

      Our business strategy emphasizes the development and deployment of broadband access technologies that will improve service providers’ return on investment by leveraging their existing infrastructure to deliver new broadband services with less expense. This strategy may result in benefits to our customers that could include faster recovery of subscriber acquisition costs, a reduction of customer turnover, a competitive edge in winning new customers, increased revenues and reduced operational and capital expenditures.

      We expect that Cable will continue to dominate our strategy as we transition from our Synchronous Code Division Multiple Access (S-CDMA) proprietary-based products to new products based on the Data Over Cable Service Interface Specification (DOCSIS) 2.0 specification from the CableLabs research and development consortium (CableLabs). DOCSIS 2.0 is the latest version of the DOCSIS specification for cable data systems, which combines two advanced modulation techniques, S-CDMA technology and advanced Time Division Multiple Access (A-TDMA). We are developing DOCSIS 2.0-based cable modems and CMTSs that we believe may have a time-to-market advantage over our competition because of our development and history of developing and bringing to market products incorporating S-CDMA technology.

      DOCSIS 2.0 builds on the capabilities of and is compatible with previous DOCSIS 1.0 and DOCSIS 1.1 specifications. Through its S-CDMA and A-TDMA advanced physical layer technologies, DOCSIS 2.0 triples the upstream throughput of cable networks, compared to DOCSIS 1.1. This greater upstream throughput is expected to enable operators to create new services for residential and business markets, such as but not limited to, video conferencing, telephone service, peer-to-peer computing and increases robustness for additional functionality and support for lifeline services. Additionally, DOCSIS 2.0 protects against noise interference.

      To maximize the return in our investment in DOCSIS 2.0 technology, we established Imedia Semiconductor Corporation (Imedia Semiconductor^TM), a wholly-owned subsidiary, in October 2001. Imedia Semiconductor consists of our former semiconductor division and will design, manufacture and sell advanced broadband silicon and software solutions to broadband equipment manufacturers.

Cable

      Cable includes products for delivering broadband data, video and voice services. Within Cable, most of our revenue comes from sales of our data products. In particular, our TeraComm cable data system, which is based on our proprietary S-CDMA technology, generates the majority of our revenue. We also sell our family of DOCSIS 1.0 and Euro-DOCSIS 1.0 CMTSs and DOCSIS 1.0, Euro-DOCSIS 1.0 and DOCSIS 1.1 and 2.0 based cable modems. Our other Cable products include the CherryPicker digital video management system and the Multigate telephony and data access system. We market and sell our Cable products to

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      To capitalize on our potential time-to-market advantage in DOCSIS 2.0, we are developing our new DOCSIS 2.0 based BW 3000 family of CMTSs and TJ 600 line of modems.

     Products

      Our TeraComm cable data system, which is based on our S-CDMA technology, enables cable operators to offer high-speed Internet access across a broad range of cable network architectures and conditions. This end-to-end system consists of a TeraLink® 1000 Master Controller and TeraLink Gateway located at a cable operator’s headend and TeraPro® cable modems installed at subscribers’ homes. Our S-CDMA cable modem system is widely deployed by leading cable operators outside the United States.

      Our BE 2000 product combines the functionality of a CMTS, which controls subscribers’ cable modems, with a high-performance Internet Protocol (IP) switch/router. The BE 2000 has been qualified as meeting the DOCSIS 1.0 specification and the Euro-DOCSIS 1.0 specification. This qualification ensures that the BE 2000 is interoperable with other DOCSIS and Euro-DOCSIS equipment, including our TJ line of DOCSIS and Euro-DOCSIS modems.

      We offer a line of high-performance cable modems certified to meet the DOCSIS 1.0 and Euro-DOCSIS 1.0 cable modem standards. These fully certified modems can interoperate with other DOCSIS and Euro-DOCSIS equipment. We are producing a next generation of TJ cable modems that are based on the DOCSIS 2.0 specification.

      Our BW 3000 family of DOCSIS 2.0-based CMTSs is composed of our BW 3500, a scalable, carrier-class solution for operators’ most demanding broadband applications, and our BW 3200, a compact solution ideal for smaller or segmented cable networks. Designed from the outset to support voice and other advanced broadband services, both models are built on an advanced hardware-centric architecture that enables intense per-flow authentication, classification and filtering, meeting the most stringent Quality of Service (QoS) requirements necessary for reliable service delivery.

      Our CherryPicker digital video management system offers cable, satellite and telecom network operators unprecedented choice, control and flexibility in managing their digital video content. For example, operators can use CherryPicker to create custom channel line-ups by “cherry picking” from a variety of content sources such as satellite broadcast and local servers to better serve their subscribers. In addition, CherryPicker can support most digital video applications, such as Near Video-on-Demand (NVOD) and seamlessly insert digital advertising into digital programming.

      Our Multigate system enables cable operators to deploy toll-quality voice services over their networks. Based on proven circuit-switch telephony technology, Multigate is unique for utilizing our S-CDMA technology. This enables cable operators to deploy Multigate without upgrading their networks as extensively as competing products require. The complete Multigate system is composed of a central unit, installed at the headend of a cable operator’s network, and CPE located in subscribers’ homes.

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     Customers

      We market and sell our Cable products to MSOs that provide broadband services to both residential and business subscribers. Our target market consists of the largest MSOs in each major geographic area, including North America, Europe and Asia.

      Our principal customers include the following:

	Shaw Communications
	Jupiter Telecommunications (Cross Beam Networks)
	Rogers Communications
	Hong Kong Cable (i-CABLE Communications)

      One of our principal customers, Rogers Communications, is a related party. Two customers, Shaw Communications and Jupiter Telecommunications, each accounted for more than 10% of our revenues for the year ended December 31, 2001. We believe that the loss of either or both of Shaw Communications and Jupiter Telecommunications could have a material adverse affect on our business. Additionally, we also believe that a substantial majority of our revenues will continue to be derived from sales to a relatively small number of customers for the foreseeable future.

     Market Competition

      The market for broadband equipment is extremely competitive and is characterized by rapid technological change, and more recently, market consolidation. In the past, most cable data systems were based on proprietary technology, meaning that modems only worked with CMTSs from the same vendor. Therefore, customers had to purchase CMTSs and modems from the same vendor. With the advent of DOCSIS certified and qualified products, customers can purchase interoperable CMTSs and modems from a variety of equipment manufacturers.

      The market leader in CMTSs is Cisco Systems, with greater than 50% market share in 2001, based on transmit ports shipped, according to the Dell’Oro Group. Cisco Systems sells DOCSIS based CMTSs, as does ADC, Arris, Juniper Networks and Motorola. We are the number two supplier of CMTSs, according to Dell’Oro, based on the number of transmit ports shipped. The vast majority of our CMTS shipments in 2001 were based on our proprietary S-CMDA technology. In 2001, competitors selling proprietary CMTSs include Motorola and Com21.

      The worldwide market leader in modems is Motorola, ranking first in the market with over 30% market share, based on both manufacturers’ revenue and units shipped, according to the Dell’Oro Group. Also according to the Dell’Oro Group, we ranked second in the market with over 15% market share based on manufacturers’ revenue and ranked third in the market with over 12% market share based on units shipped. The vast majority of our modem shipments in 2001 were based on our proprietary S-CMDA technology. The other two market leaders in modems were Toshiba and Thomson based on both manufacturers’ revenue and units shipped, according to the Dell’Oro Group. The majority of modems sold into the market in 2001 were DOCSIS based.

      In the market for video grooming and remultiplexing, we believe we are the market leader with our CherryPicker digital video management system. Although several companies are attempting to penetrate this market, we do not believe that they have yet achieved significant market penetration levels. Competitors include Cisco Systems, Harmonic and a privately held company named BigBand.

      We sell our Multigate product into the market for cable telephony systems. We believe that the market for cable telephony products is just now emerging. As a result, we have few customers and limited sales of our Multigate product. Competitors in the market include ADC, Alcatel, Arris, Nortel and Tellabs.

Telecom

      In Telecom, we develop, market and sell DSL systems and access concentrators. We offer three product lines, the Mainsail multi-service, multi-function access platform, the Miniplex digital subscriber line

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     Products

      Our MainSail 8000 MMAP provides a bridge between Metropolitan Area Networks (MAN) and local access communication systems that enables telecom carriers to deliver a wide range of optical and copper-based broadband access services with the fewest network devices. The Mainsail 8000 sets a new precedent for integration by aggregating simultaneous voice and data facilities, transport protocols and services, plus the functions of an optical multiplexer, cross connect, gateway and switch, in a single platform. As a result, telecom carriers can offer new broadband services to subscribers, simply and cost-effectively.

      Terayon’s MainSail family of integrated access devices (IAD) enables telecom carriers to provide small to medium-sized businesses with converged voice and data services. Telecom carriers’ install the MainSail IADs at their customers’ sites in either a stand-alone mode or in conjunction with Terayon’s MainSail 8000 MMAP. MainSail IADs can also be connected to other standards-based devices such as cross connects, voice switches, concentrators or multiplexors.

      Our MiniPlex digital subscriber-line multiplexer system enables telecom carriers to offer up to four telephone lines over a single copper pair. Having the ability to offer multiple telephone lines over a single copper pair is extremely important for carriers who are experiencing increased demand for phone lines but have a limited number of copper pairs.

      Our IPTL system is an innovative access system that enables international telecom carriers to provide small and medium-size businesses with integrated voice and high-speed data services. The IPTL system consists of an IAD (Integrated Access Device) located at the subscriber’s office and a DSLAM installed at a telecom carrier’s central office. The IPTL system uses SDSL, which enables high performance two-way communication.

     Customers

      We market and sell our products to telecom carriers including Incumbent Local Exchange Carriers (ILECs), Competitive Local Exchange Carriers (CLECs) and Interexchange Carriers (IXCs) that offer telecommunications services such as T1, T3, xDSL, Ethernet and OC-3C to residential and business subscribers. The MainSail 8000 MMAP has successfully penetrated some of the larger US independent local carriers, received formal product certification from a major IXC and has significant ongoing deployment with a financially sound CLEC customer. The MainSail 8000 MMAP has between 175 and 200 nodes installed supporting thousands of subscribers today. MiniPlex boasts 1.5 million lines currently in service, and counts three of the largest ILECs as customers. To date, sales of our IPTL systems have been limited and concentrated outside of the United States.

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      Our principal customers include the following:

          Quest Communications

          Verizon Communications

          NuVox Communications

          BellSouth Corporation

          SBC Communications

      None of our customers accounted for more than 10% of our revenues for the year ended December 31, 2001.

     Market Competition

      The competitive landscape for the Integrated Multi-Access Platform (IMAP) has been affected by significant volatility of service providers, as the edge/access market was the first to suffer in the communications equipment fallout. As a result, several established vendors either abandoned or lessened their commitment to the market. Leading vendors in this market include Alcatel with over 33% share of the access concentrator market based on manufacturers’ revenue in 2001, Lucent with over 11% market share and Siemens with over 10% market share, according the Dell’Oro Group. Other vendors in this market are ADC, Accelerated Networks, Efficient Networks, Integral Access, Marconi, Nortel and Zhone. We are a new entrant into this market with limited sales.

      The MiniPlex product line competes with product offerings from companies such as GoDigital and ECI. Additionally, the product segment is facing competition from other technologies that minimize the need for multiple residential phone lines such as ADSL and wireless technologies.

Research and Development

      We believe that our future success depends on our ability to enhance our existing products and to develop and introduce new products to meet the evolving needs of broadband service providers and their customers. In addition, to address competitive and pricing pressures, we believe that we must reduce the cost of manufacturing our products.

      We have designed and developed a DOCSIS 2.0 based system that includes cable modems and accompanying CMTSs. We are moving forward with commercialization of these products and believe they will be commercially available in the third quarter of 2002. Our current research and development efforts include development of multimedia platforms for the convergence of data, voice and video over existing broadband infrastructures. Total research and development costs were $79.9 million, $68.2 million, and $17.6 million for the years ended December 31, 2001, 2000, and 1999, respectively.

Sales and Marketing

      We market and sell our products directly to broadband service providers through our direct sales forces in North America, South America, Europe and Asia. We also market and sell our products through distributors, resellers and system integrators throughout these regions.

      We support our sales activities through marketing vehicles, such as industry press, trade shows, advertising and the web. Through our marketing efforts, we strive to educate broadband services providers on the technological and business benefits of our products, as well as our ability to provide quality support and service. We participate in the major trade shows and industry events for the broadband access industry in the United States and throughout the world. Industry referrals and reference accounts are significant marketing tools we develop and utilize.

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International Sales

      We have established international sales offices in five countries, including Belgium, United Kingdom, Brazil, Hong Kong and Israel. In fiscal 2001, 2000, and 1999, approximately 82%, 75% and 84%, respectively of the Company’s net revenues were to customers outside of the U.S. Sales to Canada were approximately 41%, 35% and 42% of our net revenues in fiscal 2001, 2000, and 1999. Sales to Japan were 13%, 11% and 14%. No other foreign country accounted for more than 10% of net revenues in any period. See Note 11 in our Notes to Consolidated Financial Statements contained in Item 8 for financial information on operating results and assets by geographic area.

      Almost all of our international sales are currently invoiced in U.S. dollars. However, we do enter into certain transactions originating in Brazil, Belgium, United Kingdom, Hong Kong, Canada, and Israel that may be denominated in currencies other than the U.S. dollar. In the near future, we expect that most of our business in Europe will be invoiced in euros or British pounds. Invoicing in other currencies will subject us to the risk associated with foreign exchange rate fluctuations. We will be considering the need for hedging or other strategies to minimize these risks.

      Our international operations are subject to certain risks common to foreign operations in general, such as governmental regulations and import restrictions. In addition, there are social, political, labor and economic conditions in specific countries or regions as well as difficulties in staffing and managing foreign operations, and potential adverse foreign tax consequences, among other factors that could also have an impact on our business and results of operations outside of the United States.

Customer Service and Technical Support

      We believe that our ability to provide consistently high quality service and support will be a key factor in attracting and retaining customers. Our technical services and support organization, with personnel in North America, Europe, South America and Asia, offers support 24 hours a day, seven days per week. Prior to deployment of our products, each customer’s needs are assessed and proactive solutions are implemented, including various levels of training, periodic management and coordination meetings and problem escalation procedures. We place a strong emphasis on technical training for our customers. Training is offered at our headquarters in Santa Clara and on our customers’ premises.

Backlog

      Most of our revenues are generated from orders booked and shipped within the current quarter. Assuming product availability, our practice is to ship our products promptly upon the receipt of purchase orders from our customers. Therefore, we believe that backlog information is not material to an understanding of our business.

Manufacturing

      Most of our finished goods are produced by subcontract manufacturers. During 2001, we produced modems primarily in Thailand. Currently, our modems are sole sourced from our manufacturer in Thailand. Our data and video headend equipment and our North American telecom equipment is produced in Fremont, California. Our voice systems and international telecom equipment are produced in Israel.

      Our manufacturing operations employ a wide variety of semiconductors, electromechanical components and assemblies and raw materials such as plastic resins and sheet metal. Although that we believe that the materials and supplies necessary for our manufacturing operations are presently available in the quantities required, we sometimes experience a short supply of certain component parts as a result of strong demand in the industry for those parts. See Note 3 in our Notes to Consolidated Financial Statements contained in Item 8 for financial information on purchase obligations.

      Our subcontractors purchase materials, supplies and product subassemblies from a substantial number of vendors. For many of our products, there are existing alternate sources of supply. However, for certain components contained in our products, we rely on sole sources.

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      As noted above, we sole source our modems from one subcontract manufacturer in Thailand and sole source certain components in our products from sole source vendors. While this has not resulted in material disruptions in the past, should any change in these relationships or disruptions to our vendors’ operations occur, our business and results of operations could be adversely affected.

Intellectual Property

      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 have received three letters claiming that our technology infringes the intellectual property rights of others. We have reviewed the allegations made and, after consulting with patent counsel, we have determined that the claims alleging infringement are without merit. If these allegations are submitted to a court, the court could find that our products infringe these intellectual property rights. If we are found to have infringed these rights, we could be subject to substantial damages and/or an injunction preventing us from conducting our business. In addition, other third parties may assert infringement claims against us in the future. A claim of infringement, whether meritorious or not, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing arrangements. These royalty or licensing arrangements may not be available on terms acceptable to us or at all. Litigation also may be necessary to enforce our intellectual property rights.

      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.

Employees

      As of December 31, 2001, we had 618 employees, of which 390 were located in the United States, 172 in Israel and 56 in Canada, Europe, South America and Asia. 329 of our employees were in research and development, 130 were in marketing, sales and customer support, 68 were in operations and 91 were in general and administrative functions. None of our employees are represented by collective bargaining agreements. We believe that our relations with our employees are good.

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Item 2.     Properties

      The lease for our Santa Clara, California headquarters expired in March 2002. We are negotiating a seven year lease for a new headquarters in Santa Clara, California consisting of approximately 150,000 square feet. Pending our move to our new headquarters, we will continue to rent the current facility on a month to month basis. In the United States, we also have facilities in Menlo Park and Fremont, California, where Telecom is concentrated, and development centers in Costa Mesa, California and Denver Colorado.

      In addition, we lease properties worldwide. We have a facility in Tel Aviv, Israel consisting of approximately 82,000 square feet which expires in 2005. We have sales offices in Sao Paulo, Brazil; Hong Kong; Leeds, England and Brussels, Belgium and development centers in Prague, Czech Republic and Ontario, Canada. We believe that our existing facilities are adequate to meet our needs for the immediate future.

Item 3.     Legal Proceedings

      In September 1999, a group of prospective investors in Imedia Corporation (Imedia), now our subsidiary, named Imedia as a defendant in an action alleging that Imedia breached its term sheet with the plaintiffs when Imedia negotiated its acquisition by us and, as a result, did not permit plaintiffs to invest in Imedia. The plaintiffs sought damages in excess of $12.0 million. The terms of the Imedia Agreement and Plan of Merger and Reorganization provided that shares of our common stock that were to be issued to the former shareholders of Imedia were placed in escrow to indemnify us for any damages that are directly or indirectly suffered by us as a result of plaintiffs’ claims. The value of the escrowed shares was approximately $10.0 million based on the market value of our common stock on or about the closing date of the acquisition.

      On or about September 5, 2000, the Company received an amended complaint (Complaint) in a matter captioned Evergreen Canada Israel Management, Ltd. v. Imedia Corporation, Case no. 306185, pending in the Superior Court of the State of California for the City and County of San Francisco. The Complaint alleged both (i) intentional interference with contractual relations and (ii) intentional interference with prospective economic advantage against us, claiming that we formed and operated a conspiracy to deprive plaintiffs of the opportunity to invest in Imedia. Plaintiffs argued that, prior to our purchase of the Imedia shares, we knew of an alleged, pre-existing financing agreement between plaintiffs and Imedia that contained a “no shop” clause, prohibiting Imedia from seeking or obtaining financing from any other sources, including (apparently, in plaintiffs’ view) a prohibition against Imedia selling its own stock or engaging in related transactions that preceded the acquisition. We were subsequently served with the Complaint and filed a demurrer challenging the legal sufficiency of the two causes of action. Other defendants demurred also. The demurrer hearing was held on January 16, 2001. Prior to the Court issuing a final ruling at that hearing, Plaintiffs agreed to amend their complaint. Plaintiffs filed a second amended complaint and, in response, we (and all other defendants) filed demurrers challenging all the causes of action. Our demurrer was heard on May 22, 2001, and the Court ruled (by subsequent written decision) that three contract claims and the tortuous interference with the prospective economic advantage claims should be dismissed. The Court also dismissed the two fraud claims with leave to amend.

      The Plaintiffs then filed a third amended complaint, and the defendants each filed demurrers and motions to strike challenging that pleading. The demurrers and motions to strike were argued on November 8, 2001.

      Prior to a ruling on the demurrers and motions to strike, the parties entered into a settlement agreement in which plantiffs dismissed all claims with prejudice. The parties agreed that the settlement agreement would not be construed to be an admission of any liability on our part or the part of any of the other defendants. The lawsuit was dismissed with prejudice on March 6, 2002.

      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

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      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. As of March 28, 2002, we have not received an order from the court regarding the motion to dismiss argued on December 17, 2001.

      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 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., 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 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.

Item 4.     Submission of Matters to a Vote of Security Holders

      There were no matters submitted to a vote of security holders in the fourth quarter of 2001.

PART II

      Our common stock is traded on the Nasdaq National Market under the symbol “TERN”. Public trading of our common stock commenced on August 18, 1998. Prior to that, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low per share sale prices

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Item 6.     Selected Financial Data

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