What will extract Terayon Communication Systems (Nasdaq:TERN) ( TERN) from its quagmire? No answers spring to mind.

Revenues have been sliding, its customers are in trouble, orders are down, competition is intensifying which is pressing down prices even more, and meanwhile, the great forecasts of huge demand for digital cable modems never materialized. It got sales, expecting $15-$25 million in the third quarter, but that doesn't justify the huge sums it raised over the years.

Its perky headline "Terayon Announces Progress on Operating Expense Reduction Measures" hid a sad message: the U.S.-Israeli company, which specializes in broadband services and cable modems, had to fire 165 of its 660 employees 25% of its workforce.

No surprises there. As the telecommunications industry continues to falter, the company is advancing toward its goal of "reducing quarterly operating expenses, excluding Imedia Semiconductor, to under $20 million in the first quarter of 2003", the company announced.

Terayon mentioned that $20 million goal when revealing its results in July, but didn't elaborate. Now it has, and we learn that it has finally resorted to job cuts, not small ones, and not for the first time.

For comparison, its second-quarter operating expenses (R&D, management + general, marketing + sales) were $28.3 million. Terayon says it sees its R&D spending mounting to $60 million or $65 million for the year. Its cash flow from regular operations was negative, and the company has accrued a deficit of $22 million from the start of the year.

Terayon has been a massive disappointment, among the Israeli shares traded on Wall Street. The company is technically American it is registered there, and most of its employees work on the West Coast. But its founders, Zaki and Shlomo Rakib are (or were) Israeli, had gradually tied the company's fortunes more tightly to the ex-homeland.

Zaki Rakib did that through a massive spree of acquisitions. Armed with the company's high share price and dreaming of creating a one-stop shop for broadband communications, he bought promising fledgling firms and paid in stock.

The reality is that Terayon never recouped its investment, and worse: its aggregate deficit has climbed to a massive $900 million.

In its announcement Wednesday, Terayon said that its austerity measures involved a one-time charge in the range of $2.5 million to $3.5 million for the third quarter.

"One-time" may not be the last time, though. In fact, since 2001, Terayon has set aside various provisions and revealed "one-time" charges for every quarter.

In 2001 its board approved a reorganization plan that resulted in $4 million half-year charges, climbing to $12,7 million by year-end. Of that, $3.2 million was provisions following layoffs. Now it faces similar charges again.

The job cuts aside, regulations governing recognition of goodwill and the dropping value of investments in 10 companies that Terayon made from September 1999 to December 2000 forced it to write off $572.8 million in 2001, and another $4 million in the first six months of 2002.

There were also "asides" such as suspending the development of products related to some of its product lines, which led to the writeoff of $165.8 million worth of intangible assets in the first half of 2001.

Fortunately, the company has plenty of cash - $3.7 per share, compared with its share price of $1.4. the company's market value is $104 million and it has $270 million in its kitty.

Seconds before Terayon's share price crashed, the Rakibs took advantage of its still-high share price to carry out a massive convertible bond offering, raising $500 million five times the company's valuation today.

Major banks were involved in its offering, such as Deutsche and Lehman Brothers. The conversion price of the bonds was $86 per share. Since then Terayon stock has crashed by 86%, and Terayon has evolved creative ways to ease its debt burden: it has been using some of its cash to buy back its debt, exploiting market fears about the risk the bonds carry.

In the first half of 2001, Terayon retired $195.6 million worth of debt for only $68.5 million, leading it to a $121.5 million capital gain. Liking that result, in the first six months of 2002 it bought back $74 million debt for $39.2 million cash, bringing it a net capital gain of $33.3 million.

Now the company's debt, under convertible bonds, has shrunk to $100 million. Its stock is close to an all-time low on continuing bad news, such as forecasts for the next quarter of $15 million to $25 million revenues, compared with $22.4 million for the second quarter. It is expected to post a proforma loss of 35 to 39 cents per share.

At least Rakib is making hay while the rain pours on Terayon's stock, by continuing to retire its debt. During August 2002 the company bought back $35.1 million in debt, for $18.4 million cash, which will bring it a capital gain of $15.8 million for the third quarter net. Terayon may will continue to redeem its bonds prematurely during the rest of the summer: that would seem to be its only source of joy, for now.