Headnote

Mutual Reliance Review System for Exemptive Relief Applications - registration and prospectus relief granted for issuance of shares by foreign issuer to Canadian employees, officers and directors under option and incentive plans - relief granted from the de minimis requirement in British Columbia for first trade relief, as more than 10% of issuer’s shareholders resident in Canada - issuer bid relief granted for foreign issuer in connection with payment in kind provisions under the plans.

Applicable British Columbia Provisions

Securities Act, R.S.B.C. 1996, c. 418, ss. 48, 76, 105-110 and 114(2)(c)

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO, BRITISH COLUMBIA, ALBERTA AND QUÉBEC

AND

IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF TERAYON COMMUNICATION SYSTEMS INC.

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatory authority or regulator (the “Decision Maker”) in each of Ontario, British Columbia, Alberta and Québec (the “Jurisdictions”) has received an application from Terayon Communication Systems Inc. (“Terayon” or the “Company”) for a decision pursuant to the securities legislation of the Jurisdictions (the “Legislation”) that:

(i) the requirements contained in the Legislation to be registered to trade in a security and to file and obtain a receipt for a preliminary prospectus and a prospectus (the “Registration and Prospectus Requirements”) shall not apply to certain trades in shares of Terayon common stock (the “Shares”) made in connection with the Terayon 1995 Stock Option Plan (the “SOP”); the Terayon 1997 Equity Incentive Plan (the “1997 EIP”); the Terayon 1999 Non-Officer Equity Incentive Plan (the “1999 EIP”); and the Terayon 1998 Employee Stock Purchase Plan (the “ESPP”) (collectively the “Plans”); and

(ii) the requirements contained in the Legislation relating to issuer bids (the “Issuer Bid Requirements”) shall not apply to certain acquisitions by the Company of Shares pursuant to the Plans.

AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the “System”), the Ontario Securities Commission is the principal regulator for this application;

AND WHEREAS Terayon has represented to the Decision Makers as follows:

1. Terayon is presently a corporation incorporated under the laws of the state of Delaware. The executive offices of Terayon are located in Santa Clara, California.

2. The Company is registered with the Securities Exchange Commission (the “SEC”) in the United States under the United States Securities Exchange Act of 1934 (the “Exchange Act”) and is not exempt from the reporting requirements of the Exchange Act pursuant to Rule 12G 3-2 made thereunder.

3. The Shares are quoted on the Nasdaq National Market (“Nasdaq”) under the symbol “TERN”.

4. Terayon is not a reporting issuer in any Jurisdiction and has no present intention of becoming a reporting issuer in any Jurisdiction. The majority of the directors and senior officers of Terayon reside outside of Canada. One director resided in Alberta.

5. The authorized share capital of Terayon consists of 200,000,000 Shares and 5,000,000 shares of preferred stock (“Preferred Shares). As of April 13, 2001, there were 67,604,392 Shares and no Preferred Shares issued and outstanding.

6. Under the SOP, 1997 EIP, and 1999 EIP, (collectively the “Incentive Plans”) options exercisable for Shares (the “Options”), stock bonuses (the “Stock Bonuses”) and rights to purchase restricted stock (the “Restricted Stock”) (collectively, the “Awards”) may be granted to employees, directors, officers and consultants of Terayon and its affiliates (the “Terayon Companies”). Under the ESPP employees of the Terayon Companies are able to purchase Shares. Collectively employees, directors, officers and consultants participating in the Incentive Plans and the ESPP are referred to herein as the “Participants”.

7. Employees who participate in the Plans will not be induced to exercise Options or purchase Shares by expectation of employment or continued employment. Consultants who participate in the Plans will not be induced to exercise Options or purchase Shares by expectation of the individual consultant, the consultant’s company or the consultant’s partnership being engaged or continuing to be engaged as a consultant. Officers who participate in the Plans will not be induced to exercise Options or purchase Shares by expectation of appointment or employment or continued appointment or employment as an officer.

8. It is anticipated that consultants who will be granted Awards under the Plans will (a) provide technical, business, management or other services to the Terayon Companies (other than services relating to the sale of securities or promotional/investor relations services); (b) provide consulting services to the Terayon Companies under a written contract; (c) have a relationship with the Terayon Companies that will permit them to be knowledgeable about the business affairs of Terayon; and (d) will spend a significant amount of time and attention on the affairs and business of one or more of the Terayon Companies.

9. The Plans are administered by the board of directors (the “Board”) of the Company and/or a committee appointed by the Board (the “Committee”).

10. The purpose of the ESPP is to provide employees of the Terayon Companies an opportunity to purchase Shares through payroll deductions.

11. The purpose of the Incentive Plans is to provide a means by which selected employees, directors, officers, and consultants of the Terayon Companies may be given an opportunity to purchase Shares and to benefit from increases in the value of the Shares.

12. All necessary securities filings have been made in the U.S. in order to offer the Plans to Participants resident in the U.S. As is required by U.S. law, the ESPP, SOP and 1997 EIP (but not the 1999 EIP) have been approved by the shareholders.

13. A prospectus prepared according to U.S. securities laws describing the terms and conditions of the Plans will be delivered to each employee who is eligible to participate in the ESPP and to each Participant who is granted an Award under the Incentive Plans. The annual reports, proxy materials and other materials Terayon is required to file with the SEC will be provided or made available to Canadian Participants at the same time and in the same manner as the documents are provided or made available to U.S. Participants. In Québec, the most recent audited annual financial statements will also be provided to each Participant resident in Québec.

14. Awards and rights under the Plans may not be assigned, transferred, pledged or otherwise disposed of other than by will or the laws of intestacy.

15. Following the termination of a Participant’s relationship with the Terayon Companies, a former Participant or in some cases the Participant’s or former Participant’s estate, the legal representative of a Participant or of a former Participant, or the beneficiary of a Participant or Former Participant by a designation or by will or the laws of intestacy (collectively, the “Former Participants”) will continue to have rights in respect of the Plans. Post-termination rights may include, among other things, the right of a Former Participant to exercise an Award for a specified period following termination and the right to sell Shares acquired under the Plans through the Agents.

16. Terayon intends to use the services of one or more agents/brokers (the “Agents”) for each of the Plans. The current Agents for the Plans are Deutsche Banc Alex Brown Inc. and Salomon Smith Barney, Inc. Terayon intends to add E*TRADE Securities, Inc. as a third Agent shortly. The current Agents are, and if replaced, or if additional Agents are appointed, will be registered under applicable U.S. securities or banking legislation and have been or will be authorized by Terayon to provide services under the Plans. The Agents are not registered to conduct retail trades in any of the Jurisdictions and, if replaced, or additional Agents are appointed, are not expected to be so registered in any of the Jurisdictions.

17. The Agents’ role in the Plans may include: (a) assisting with the administration of the Plans, including record-keeping functions; (b) facilitating the exercise of Awards granted under the Plans (including cashless and stock-swap exercises) to the extent that they are exercisable for Shares; (c) holding Shares issued under the Plans on behalf of Participants and Former Participants; and (d) facilitating the resale of the Shares issued in connection with the Plans.

18. As there is no market in the Jurisdictions for the Shares and none is expected to develop and it is expected that any resale of Shares will be effected through the facilities of the Nasdaq.

19. As of March 31, 2001, there were four employees in Canada eligible to participate in the ESPP and nine Participants eligible to receive Awards under the Incentive Plans.

20. An eligible employee may purchase Shares through accumulated payroll deductions Shares at a discount to the market price to a maximum of 15% of their Earnings (as defined in the ESPP). Subject to the discretion granted under the ESPP to the Board or Committee Shares will be issued by Terayon to the Agents on a periodic basis based on the level of accumulated payroll deductions of each Employee participating in the ESPP.

21. Generally, in order to exercise an Option or other exercisable Award, the Participant or Former Participant, must submit to the Agents a written notice of exercise identifying the Award and the number of Shares being exercised, together with full payment of the exercise price. The exercise price of an Award may be paid in cash or where permitted by the Committee, by way of a cashless exercise, promissory note, stock-swap exercise, or such other method permitted by the Committee.

22. Pursuant to the Incentive Plans the acquisition of Shares and or Options by the Company in certain circumstances may constitute an “issuer bid”. The terms of the Incentive Plans permit: (a) Award holders to surrender Shares to the Company to satisfy government withholding tax obligations or on a stock-swap exercise; (b) the Company to withhold Shares to satisfy government withholding tax obligations; (c) the Company to cancel outstanding Awards and the substitute new Awards for repricing purposes; (d) the Company to repurchase Shares where an Option has been exercised prior to the Option being fully vested; and (e) the Company to repurchase or otherwise reacquire Shares held by that person which have not vested as of the date of termination under the terms of the Restricted Stock purchase agreement. The Shares acquired by the Company will either be cancelled by the Company or put into the Company treasury. The exemptions in the Legislation from the Issuer Bid Requirements may not be available for such acquisitions by the Company since such acquisitions may occur at a price that is not calculated in accordance with the “market price,” as that term is defined in the Legislation and may be made from persons other than employees or former employees.

23. Canadian Participants, including Former Participants, who wish to sell Shares acquired under the Plans may do so through the Agents.

24. As of April 13, 2001 two Canadian shareholders (the “Strategic Partners”), one resident in Alberta, and the other resident in Ontario, together own approximately 8.92% and 4.79% respectively, of the outstanding voting securities of Terayon. The remaining Canadian shareholders represent in number less than 1% of the registered and beneficial holders of Terayon’s Shares and hold less than one-tenth of 1% of Terayon’s outstanding Shares.

25. The Strategic Partners have represented to Terayon that they have acquired securities of Terayon for investment only and not with a view to distribution.

26. When the Agents sell Shares on behalf of Participants or Former Participants, the Agents, the Participants and the Former Participants may not be able to rely upon the exemption from the Registration Requirement contained in the Legislation of certain Jurisdictions.

27. The Legislation of certain of the Jurisdictions does not contain exemptions from the Prospectus and Registration Requirements for intended trades in Options, Shares or other Awards under the Plans.

AND WHEREAS pursuant to the System, this Decision Document evidences the decision of each Decision Maker (collectively, the “Decision”);

AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met;

THE DECISION of the Decision Makers pursuant to the Legislation is that:

(i) the Registration and Prospectus Requirements shall not apply to any trade or distribution of Options or Shares to or on behalf of Participants made in connection with the Plans, including trades and distributions involving the Agents or Former Participants and provided that first trades of Shares acquired through the Plans pursuant to this Decision shall be deemed a distribution under the Legislation unless such first trade is executed on a stock exchange or market outside of Canada;

(ii) the first trade by Participants or Former Participants in Shares acquired pursuant to the Plans including first trades effected through the Agents, shall not be subject to the Registration Requirement, provided such first trade is executed through a stock exchange or market outside of Canada; and

(iii) the Issuer Bid Requirements of the Legislation shall not apply to the acquisition by Terayon of Shares or Awards from Participants or Former Participants provided such acquisitions are made in accordance with the terms of the Plans.

DATED October 4th, 2001.

Howard I. Wetston R. Stephen Paddon