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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED: OCTOBER 31, 2001

OR

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

FOR THE TRANSITION PERIOD FROM                              TO                             

COMMISSION FILE NUMBER: 0-11552

TELEVIDEO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

2345 HARRIS WAY, SAN JOSE, CALIFORNIA 95131

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 954-8333

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE

(TITLE OF CLASS)

      INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES /x/  NO / /

      THE APPROXIMATE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK HELD BY NON-AFFILIATES ON FEBRUARY 5, 2002 (BASED UPON THE CLOSING SALES PRICE OF SUCH STOCK AS REPORTED IN THE OVER THE COUNTER MARKET AS OF SUCH DATE) WAS $1,357,200.

      AS OF FEBRUARY 5, 2002, 11,310,000 SHARES OF REGISTRANT'S COMMON STOCK WERE OUTSTANDING.

      DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's Definitive Proxy Statement to be used in connection with Registrant's Annual Meeting of Stockholders to be held on April 16, 2002 have been incorporated by reference into Part III of this Annual Report on Form 10-K.

      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 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.

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K for the fiscal year ended October 31, 2001 includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included in this Annual Report that address activities, events or developments that the company expects, believes or anticipates will or may occur in the future, including, but not limited to, such matters as future product development, business development, marketing arrangements, future revenues from contracts, business strategies, expansion and growth of the company's operations and other such matters are forward-looking statements. These kinds of statements are signified by words such as "believes," "anticipates," "expects," "intends," "may," "will", and other similar expressions. However, these words are not the exclusive means of identifying such statements. These statements are based on certain assumptions and analyses made by the company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including the risk factors discussed below, general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by the company, changes in law or regulations and other factors, many of which are beyond control of the company. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

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TABLE OF CONTENTS

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INTRODUCTORY STATEMENT

        References in this Form 10-K to "TeleVideo," the "Registrant," "We" or the "Company" refer to TeleVideo, Inc. and its subsidiaries unless the context indicates otherwise. This report contains registered and unregistered trademarks of other companies.

PART I

ITEM 1. BUSINESS

THE COMPANY

        Founded in 1975, TeleVideo is a market leader providing innovative high performance terminal and network computer products to the business and consumer markets. The Company markets its products worldwide primarily through distributors, value-added resellers ("VARs"), systems integrators and original equipment manufacturers ("OEMs").

        The Company first became a leader in the video display terminal industry by introducing a new generation of "smart" terminals based on the Intel microprocessor at a time when dumb terminals were the industry standard. TeleVideo holds a number of proprietary terminal emulations, including the TV910 and TV9425, which have been an industry standard for more than 15 years and are currently used in millions of terminals worldwide. Today, TeleVideo is utilizing its expertise in server-based network computing to forge new ground in delivering thin-client solutions. Thin-client is used to define a terminal category, which doesn't have local storage devices, all the data having been saved on the server.

PRODUCTS

TeleCLIENT Family

        TeleVideo's TeleCLIENT products consist of a family of thin-client Windows-based terminals. The TC7010 is a stand-alone design that can be connected to a variety of monitors to meet specific needs. The TC7155 and TC7175 are integrated units with 15 and 17-inch color CRT monitors, respectively. The TeleCLIENT TC7300 Series is a fully integrated Windows-based thin-client with a built-in high-resolution thin film transistor (TFT) LCD screen. Bundled as an all-in-one design, the TC7300 Series is designed for use in limited workspaces.

        In November 2001, TeleVideo introduced its latest line of products, TeleCLIENT TC7020 and TC7380, which are the wireless-touch screen versions of the TC7010 and TC7370 respectively. The all-in-one LCD flat panel and stand-alone Thin Clients come with built-in hardware and software to support wireless LAN connectivity. Through a built-in mini PCI slot, both TC7380 flat panel and TC7020 stand-alone Thin Clients can support widely available wireless LAN options using the 802.11b wireless protocol. Their availability will make deployment much easier and cost effective for IT departments and businesses than conventional wired deployments. Also, the all-in-one TC7380 LCD flat panel Thin Client comes with a touch screen display. The TC7380 utilizes a resistive touch screen that allows users to access application commands through touch activated prompts on the screen. This allows IT professionals and users in many industries such as point-of-sale, healthcare, financial and education to increase efficiency and productivity. The TC7020 stand-alone Thin Client also has built-in software that will support optional touch screen enabled monitors.

        The TeleCLIENT family of products is designed for use in the healthcare, government, education, retail and other task-oriented client/server based computing environments. TeleVideo's thin-clients are accelerated by a Pentium-class 300MHz microprocessor. Windows CE powers TeleCLIENT thin-clients, which enable fast and easy access to business-critical applications.

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        The TeleCLIENT family of products also provides flexibility to choose the Remote Desktop Protocol that executes either the Windows NT 4.0 Terminal Server Edition, or the Citrix ICA protocol through Citrix MetaFrame or WinFrame. Windows CE gives the TC7010, TC7020, TC7155, TC7175 and the TC7300 Series server-side access to popular Windows-based business applications such as the Microsoft Office suite and Java, as well as the Internet.

        In addition, our TeleManager software provides complete remote administration of TeleCLIENT from one central location.

Video Display Terminals

        The 990 is a general-purpose terminal with ASCII, ANSI and PC TERM operating modes. For maximum versatility and flexibility, the terminal is compatible with a wide variety of keyboard styles and allows users to interface to a bar code scanner, wand reader, credit card reader, electronic scale or other specialized keyboards for point-of-sale or point-of-transaction processing.

        The TeleVideo 995-65 14-inch monochrome terminal allows the user Alpha Windowing capability at a non-windowing price for new or existing software applications. The windows capability provides increased productivity for applications running on UNIX. The 995 also has a power management screen saver, which protects the environment and promotes energy conservation.

iTelePC

        TeleVideo's iTelePC iT2000 is an "internet appliance," a new and relatively low-cost PC, designed for Internet access and specialized business use, but without the full capabilities of a personal computer. The iTelePC iT2000 comes integrated with a 15-inch monitor that brings the Internet to the household or business in a small, easy-to-use design. Powered by Microsoft Windows CE, the 233 MHz iT2000 comes with no set-up required.

        During the fiscal 2001, the demand for this product was at a lower level than we have expected, and the Company is analyzing the possibility to retire it from production.

Auto Safety Devices

        In October 2000, the Company introduced a new line of products, mobile electronics, represented by Alladin-2000 and Mobile Secretary KFH-2001K. Also, during the fiscal year 2001, the Company introduced another auto safety product, Back-Up View.

        The Aladdin A-2000 is an advanced two-way remote vehicle starting and security system, providing around-the-clock surveillance and security. The interactive bi-directional remote control is in constant communication with the system module, allowing the vehicle to be monitored closely through visual warning and audible or vibrating alarm.

        The Mobile Secretary is designed to allow the safe use of cellular phones while driving, and the Back-Up View is a system who can detect if there is an obstacle at a certain distance behind the vehicle, when the car is moving back.

        Due to the high level of competition on the market of these products, the Company didn't meet its goals regarding sales and revenue expected for the first two quarters of the fiscal 2001. Consequently, in the third quarter of the fiscal 2001 we have decided to discontinue the production of auto safety devices.

PRODUCT DEVELOPMENT

        TeleVideo serves markets that are characterized by rapid technological change and the Company has continuous ongoing programs to develop new products. Although the Company's research and

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development staff consists of 5 employees as of December 10, 2001, engineers from participating companies support various joint projects of the Company. During fiscal 2001, TeleVideo spent approximately $0.8 million on Company-sponsored research and development. Company-sponsored research and development expenses for fiscal 2000 and 1999 were approximately $0.9 million and $0.6 million, respectively. The Company did not engage in any customer-sponsored research and development program during such years.

        Because of the fast pace of technological advances, the Company must be prepared to design, develop and manufacture new and more powerful low-cost products in a relatively short time. TeleVideo believes it has had mixed success to date in accomplishing these goals simultaneously. Like other companies in the computer industry, it will continue to experience delays in completing new product design and tooling. There is no assurance that the Company will be able to design and manufacture new products, including its iTelePC and TeleCLIENT family of products that respond to the rapid changes in the marketplace.

SALES, MARKETING AND CUSTOMERS

        North American sales are handled from TeleVideo sales offices located in San Jose, California, Lake Forest, California and Hoffman Estates, Illinois. Products are sold through distributors, mass merchants, retail stores, VARs, systems integrators and OEMs.

        Products sold in Europe, Asia Pacific, Africa and Latin America are handled by the Company's office in San Jose, California through distributors, OEMs and international representatives. The Company also appointed, in fiscal 2001, an agent in the United Kingdom to manage existing customer relationships and to build new ones throughout Europe. In September 2001, the Company appointed a new agent in the Netherlands, simultaneous with the termination of the contract with the agent from the United Kingdom.

        TeleVideo distributors generally do not have exclusive geographic territories. Either party can generally terminate distributor contracts without cause upon advanced written notice of 30 days or 60 days. TeleVideo's distributors typically handle a variety of computer-related products, including products competitive with those of TeleVideo. The typical distribution arrangement requires the distributor to purchase TeleVideo products with certain limited stock rotation rights. Distributors may also exercise price protection rights should the Company's product price be reduced.

        TeleVideo, through its headquarters' marketing and supporting staff, continues to work closely with its distributors, mass merchants, retail stores, VARs, systems integrators and original OEMs. TeleVideo's marketing staff also provides the customers with training, sales and promotional materials, cooperative advertising programs, trade show participation and sales leads. The marketing organization also leads the product marketing role giving direction to product management and competitive positioning. The Company spent approximately 3% ($0.2 million), 3% ($0.2 million) and 9% ($0.7million) of its net revenues on advertising in fiscal 2001, 2000 and 1999, respectively.

        TeleVideo's customers typically purchase the Company's products on an as-needed basis. Therefore, the Company will continue to manufacture its products based on sales forecasts and upon customer orders. As a result of this strategy, the Company believes that backlog is not material to its business taken as a whole. Because of the possibility of customer changes in delivery schedules or cancellation of orders, which is not uncommon in the computer industry, the Company's backlog as of any particular date may not be indicative of actual net sales for any succeeding period.

        For the fiscal year ended October 31, 2001, no single customer represented 10% or more of total net revenue, compared with the fiscal 2000, when TeleVideo's largest customer amounted for 12% of the Company's sales. TeleVideo's sales terms are 1typically net 30 or net 45 days.

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INTERNATIONAL SALES

        The Company had export sales (primarily to Europe, Asia and Latin America) of approximately $1.7 million in fiscal 2001 (representing 24.7% of total net sales), $2.4 million in fiscal 2000 (34.0% of total sales) and $1.6 million in fiscal 1999 (19.4% of total net sales). In fiscal 2001, the Company appointed an agent in the United Kingdom to manage existing customer relationships and to build new ones throughout Europe. The Company is evaluating the feasibility of establishing a fully equipped TeleVideo presence in Europe but has made no commitments in this regard.

        TeleVideo's international sales are subject to certain risks common to non-United States operations, including but not limited to governmental regulations, import restrictions and export control regulations, changes in demand resulting from fluctuations in exchange rates, as well as risks such as tariff regulations. TeleVideo's international sales are generally U.S. dollar-denominated and, therefore, are not directly subject to international currency fluctuations. The strength of the dollar in relation to certain international currencies may, however, adversely affect the Company's sales to international customers.

JOINT VENTURE AND INVESTMENT ACTIVITY

Equity Method

Applied Photonics Technology, Inc.

        On April 16, 1997, the Company entered into a Common Stock Purchase Agreement with Applied Photonics Technology, Inc. (APT), a California corporation, whereby the Company purchased a 30% interest in APT for $3.0 million.2

        During the fiscal year ended October 31, 1998, the Company wrote off its equity investment, related goodwill, and note receivable of approximately $4.1 million. During 1999, the Company granted and wrote off loans and advances to APT totaling $426,000. The Company has not guaranteed any obligations of APT and has made no commitments to provide additional financial support to APT.

Mulix, Inc.

        On February 2000, the Company purchased for $1,000,000 in cash an aggregate of 14,269,230 shares of unregistered Series A Convertible Preferred Stock of Mulix, Inc., a Delaware corporation. The Company's investment in Mulix represents a 35% interest in this privately held corporation. The investment is accounted for on the equity method of accounting.

        Mulix was dissolved effective November 30, 2000. Thus, the entire investment was written off as of October 31, 2000.

K&T Telecom, Inc.

        In July 2000, the Company purchased for $600,000 in cash an aggregate of 9,608 shares of stock of K&T Telecom, Inc. K&T Telecom, Inc. is a Korean company; and its main activity is manufacturing telecommunication and electronics devices, including a hands-free accessory and collision sensors. The Company's investment in K&T Telecom, Inc. represents a 49% interest in this privately held corporation. The investment is accounted for on the equity method of accounting.

        If K&T Telecom, Inc. subsequently increases its capital, TeleVideo will be given the opportunity to participate in the stock issuance in order to maintain the percentage of stock currently held by TeleVideo.

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        During the fiscal year 2001, due to the decrease in the estimated fair market value of K&T Telecom, the Company decreased the carrying value of this investment on the financial statements from $600,000 to $274,230, proportionally with its interest in this company.

        Also, the Company is considering the possibility to withdraw from this joint venture.

Alpha Technology, Inc.

        In August 2000, the Company purchased for $650,000 in cash an aggregate of 9,608 shares of stock of Alpha Technology, Inc. Alpha Technology, Inc. is a Korean company, manufacturing electronic and car accessories, including two way car alarm systems. The Company's investment in Alpha Technology, Inc. represents a 49% interest in this privately held corporation. The investment is accounted for on the equity method of accounting.

        If Alpha Technology, Inc. increases its capital thereafter, TeleVideo will be given the opportunity to participate in the stock issuance in order to maintain the percentage of stock held currently by TeleVideo.

        In the fiscal year 2001, due to the decrease in the estimated fair market value of Alpha Technology, the Company adjusted the carrying value of this investment on the financial statements from $600,000 to $418,033.

        In November 2001, the Company decided to withdraw from this joint venture, and to sell our interest in Alpha Technology to Gem Management, a company owned by Gemma Hwang, Dr. Hwang's wife.

        In exchange for the 9,608 shares of Alpha Technology, the amount of approximately $418,000 (the value of transaction and the book value of Alpha Technology investment as of July 31, 2001) will be deducted from the Note Payable owed by TeleVideo to Gem Management. Before the transaction, the Company owed to Gem Management $1.5 million, bearing an annual interest of 8%.

Ningbo China

        In October 2000, the Company invested $1,000,000 in Televideo (China) Co., Ltd. (Ningbo China) for a 10% interest. The Company has agreed to invest an additional $2,000,000 in December 2000. The total investment will represent a 30% interest in this company, which will manufacture computer terminals and monitors. This investment is currently accounted for using the equity method.

        The investment agreement also provides for the use of TeleVideo's technical production skill of terminal products. For the use of this technology Ningbo China will pay the Company $2.5 million dollars over two years as follows: $1.2 million is to be received in December 2000 and the remaining $1.3 million in two installments of $650 thousand in June 2001 and June 2002. For this money we will give to Nimbo China the right to use our technology and we will provide professional training for the use of this technology. The most important technology is related to the processor used for TeleClient.

        During December 2000, the Company invested $2,000,000 in Ningbo China for an additional 20% ownership interest. Accordingly in December 2000, the Company changed its method of accounting for this investment to the equity method.

        During December 2000, the Company received approximately $1,000,000 from Ningbo China. In January 2001 and April 2001, the Company received additional $120,000 and $200,000, respectively. The difference up to $1,400,000 was expensed as government and transfer fees. The Company agreed with Ningbo to reschedule the payment for the remaining amount of $1,100,000 as follows: $150,000 to be paid in June 2002, $250,000 to be paid in September 2002, $300,000 to be paid in December 2002 and $400,000 to be paid by March 31, 2003.

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        In the third quarter of fiscal 2001, because a couple of investors have withdrawn from this joint venture, the capital of Ningbo was decreased to around $5.0 million, from an initial amount of 10.0 million. Due to this fact, the Chinese government asked Ningbo to change the initial agreement with TeleVideo and to record the payments made by Ningbo to TeleVideo as withdraw of investment, instead of payments for the technology and training. The Company agreed with this change, and, consequently, we have reduced the amount showed as investment on the financial statements from $3.0 million to $1.7 million.

        Also, due to the decrease recorded in the estimated fair market value of Ningbo, the Company adjusted the carrying value of this investment on the financial statements from $1.7 million to $1.5 million, proportionally with its interest in this company.

Cost Method

mySimon, Inc.

        In September 1998, the Company invested $1 million in the online comparison shopping Internet company, mySimon, Inc., receiving convertible preferred stock.

        On February 29, 2000, CNET Networks, Inc. (formerly, CNET, Inc. or "CNET") completed the acquisition of mySimon, Inc. As a result of this acquisition, the Company received 375,108 shares of common stock of CNET in exchange for 100% of its interest in mySimon, Inc. During same period of time, the Company also adjusted its balance sheet to reflect the conversion to a marketable security. The cost method used to book the investment in mySimon was changed to market value method in accordance with SFAS 115 to record the investment in CNET stock.

        During the fiscal year 2000 and 2001, the Company recognized gains from the sales of CNet stocks of $10.1 million and $0.3 million respectively.

        On January 10, 2002, the Company owned approximately 32,500 shares of CNET common stock and the market value was approximately $9.00per share.

Koram, Inc.

        In February 1998, the Company purchased a 50% interest in Koram, Inc, a Korean restaurant venture. This investment was accounted for under the equity method of accounting. During 2000, the Company decided to discontinue its participation in this joint venture. The Company's venture partner agreed to transfer the funds for our participation into the TeleVideo account when the exchange rate Korean Won and US Dollar will be the most advantageous. As such, the Company accounts for this investment under the cost method of accounting.

        In November 2001, the Company decided to pay back a portion from the Gem Management's loan with the funds deposited in Korea, which were in a total amount of approximately $64,000. Before the transaction, the Company owed to Gem Management $1.5 million, bearing an annual interest of 8%.

Biomax Co, Ltd.

        On May 12, 2000, the Company purchased for a cash investment of $917,431 an aggregate of 45,000 ordinary shares of Biomax Co., Ltd. ("Biomax"). Biomax is a startup company, with its principal offices located in Seoul, Korea, engaged in developing an herbal product to help lower cholesterol levels in humans. Its existing technology was developed by and obtained from the Korea Research Institute of Bioscience and Biotechnology. The Company's investment in Biomax represents a 15% interest in this privately held corporation. The investment is accounted for on the cost method of accounting.

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        The agreement gives the Company the right to nominate one member to the Biomax Board of Directors. Dr. K. Philip Hwang, the Company's Chairman of the Board and Chief Executive Officer, was nominated and elected to the Biomax board.

        The Company has the right to participate in future sales of Biomax securities to maintain its proportionate interest in Biomax. In the event the Company wants to sell all or a portion of its shares, it has given Biomax and Biomax's President, who is its controlling shareholder, a right of first refusal to purchase the shares. The controlling shareholder also must obtain the Company's prior written consent in order to sell over 10% of Biomax.

        Biomax also agreed to discuss with the Company certain specified kinds of events and transactions that could materially impact Biomax's business, capital structure and financial condition. The agreement further prohibits Biomax from sharing its technology with third parties or assisting with research and development efforts of third parties without the prior written consent of the Company, other than in the normal course of business, and further prohibits the controlling shareholder from engaging in businesses that could compete with Biomax. The restrictions and promises in the agreement will terminate at such time as the Company has sold at least 70% of the shares it acquired under the agreement.

        During the fiscal 2001, due to the decrease in the estimated fair market value of Biomax, the Company adjusted the carrying value of this investment on the financial statements from $917,431 to $115,978, proportionally with its interest in this company.

Xeline (Keyin) Telecom Co. Ltd.

        On May 12, 2000, the Company purchased for $2,522,972 an aggregate of 15,278 ordinary shares of Xeline (Keyin) Telecom Co. Ltd. ("Xeline"). Xeline is a private company located in Seoul, Korea, which is engaged in developing power line technology for electricity transportation. The Company's investment in Keyin represents a 5.75% interest in this corporation. The investment is accounted for on the cost method of accounting.

        The Company has the right to participate in future sales of Xeline (Keyin) securities to maintain its proportionate interest in Xeline (Keyin). In the event the Company wants to sell all or a portion of its shares, it has given Xeline (Keyin) and its controlling shareholder, who is also its President and Chief Executive Officer, a right of first refusal to purchase the shares.

        Xeline (Keyin) also agreed to keep the Company expressly advised regarding certain specified kinds of events and transactions that could materially impact Xeline (Keyin)'s business, capital structure and financial condition. Xeline (Keyin) has agreed that it will not transfer its power line communications ("PLC") technology to a third party without the prior written consent of the Company, except in the context of a strategic technology transfer agreement approved by the Xeline (Keyin) Board. The restrictions and promises in the agreement will terminate at such time as the Company has sold at least 70% of the shares it acquired under the agreement.

        The investment agreement also contemplates that TeleVideo will participate in a strategic alliance with Xeline (Keyin) under the terms of which TeleVideo will support Xeline (Keyin) in its overseas marketing and sales activities related to Xeline (Keyin)'s PLC technology. In addition, TeleVideo and Xeline (Keyin) will cooperate to incorporate Xeline (Keyin)'s PLC technology into TeleVideo's computer products, including the Tele-Client series. The parties contemplate entering into a separate sales and marketing agreement to more fully document the terms and conditions of the strategic relationship.

        During the fiscal year 2001, due to the decrease of the estimated fair market value of Xeline (Keyin), the Company adjusted the carrying value of this investment on the financial statements from $2,522,972 to $308,755, proportionally with its interest in this company.

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Synertek, Inc.

        In June 2000, the Company purchased for $1,000,000 in cash an aggregate of 285,714 shares of common stock of Synertek, Inc., a Nevada corporation, representing an 8% interest in this company. Synertek, Inc. manufactures and sells handheld digital multimedia and communications appliances. The cash investment is accounted for on the cost method of accounting.

        During the fiscal year 2001, due to the change in financial position of Synertek, the Company adjusted the carrying value of this investment on the financial statements from $1,000,000 to $211,528, proportionally with its interest in this company.

COMPETITION

        TeleVideo believes that brand recognition, product quality, availability, extensive standard product features, service and price are significant competitive factors in the Company's markets. In addition to the factors listed above, the principal considerations for distributors and resellers in determining which products to offer include profit margins, immediate delivery, product support, and credit terms. TeleVideo has continued and in the future will likely continue to face significant competition, with respect to these factors, particularly from the large international manufacturers. Most of these companies have significantly greater financial, marketing and technological resources than the Company, and may be able to command better terms with their suppliers due to higher purchasing volumes. Therefore, there is no assurance that the Company will be able to successfully compete in the future.

PRODUCTION

        The Company subcontracts substantially all of the manufacturing of its products to manufacturers in Taiwan, the People's Republic of China and South Korea. The testing, inspection and some minor assembly work are done at our California headquarters. We believe our current 3facilities in California will continue to be adequate for our purposes for the foreseeable future.

        The Company's largest supplier accounted for approximately 51% (approximately $1.9 million) of net purchases in fiscal 2001. Loss of this supplier might have an adverse effect on the product supply of the Company. The Company believes, however, that in most cases, alternative sources of supply could be arranged as and when needed by the Company. To date, TeleVideo has not experienced any significant difficulties or delays in production of its products.

PROPRIETARY RIGHTS

        The Company regards certain aspects of its products as proprietary and relies upon a combination of trademark and copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company has registered trademarks in the United States and in over 20 foreign countries for "TeleVideo" and the TeleVideo logo.

        The continuing development of the Company's products and business is dependent, primarily, on the knowledge and skills of certain of its employees. To protect its rights to its proprietary information, the Company requires all employees and consultants to enter into confidentiality agreements that prohibit the disclosure of confidential information to persons unaffiliated with the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's technology or other confidential information in the event of any unauthorized use or disclosure. There also can be no assurance that third parties will not independently develop products similar to or duplicative of products of the Company. The Company believes that due to the rapid pace of technological change in its industry, the Company's success is likely to depend more upon continued

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innovation, technical expertise, marketing skill and customer support than on legal protection of the Company's proprietary rights.

GOVERNMENT REGULATIONS

        Most of the Company's products are subject to regulations adopted by the Federal Communications Commission ("FCC"), which establishes radio frequency emanation standards for computing equipment. TeleVideo believes that all of the Company's products that are subject to such regulations comply with these regulations. Although there can be no assurance, the Company has no reason to believe that new products will not also be approved. Failure to comply with the FCC specifications could preclude the Company from selling non-complying systems in the United States until appropriate modifications are made. To date, the Company has not encountered any FCC compliance problems.

EMPLOYEES

        As of January 10, 2002, the Company's full-time employees totaled 31, as compared with 38 reported at the end of fiscal 2000. Of the total number of employees, 15 are engaged in product research, engineering, development and manufacturing, 8 in marketing and sales and 8 in general management and administration. We believe that our future success will depend, in part, on our ability to continue to attract and retain highly skilled technical, marketing and management personnel.

        None of the Company's employees are subject to a collective bargaining agreement or represented by a union, and the Company has never experienced a work stoppage. We believe that our employee relations are good.

ITEM 2. PROPERTIES

        The Company's headquarters, research and development and administrative operations are housed in a 69,630 square foot building located on 2.5 acres in San Jose, California. On December 28, 1998, the Company sold the building and has leased it back. The aggregate monthly lease amounts are $114,000. Please refer to Note 9 of the financial statements ("Sale and Leaseback of Building") for additional details. The lease expires on December 31, 2013.

        The Company leases domestic sales offices in Hoffman Estates, Illinois and Lake Forest, California. Both are month-to-month tenancy leases. Management believes that the Company would be able to secure an extension to the leases if such extensions are deemed necessary in the future. Both leases are accounted for as operating leases.

ITEM 3. LEGAL AND OTHER PROCEEDINGS

LEGAL PROCEEDINGS

        None

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

        No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2001.

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EXECUTIVE OFFICERS

        The following sets forth certain information with regard to executive officers of TeleVideo (ages are as of January 10, 2002):

        Dr. K. Philip Hwang, age 66, is the founder of the Company and has been Chairman of the Board and Chief Executive Officer since October 1976. From August 1990 to April 1991 and from June 2000 to present, he has served as the Acting Chief Financial Officer. Dr. Hwang is also a member of the Board of Directors of Biomax Co., Ltd.

        Jun Keun Yum, age 50, joined TeleVideo in January 1999 as Vice President of Operations and Chief Technology Officer. From February 2000 to present, he served as the Vice President of Sales. Mr. Yum was a General Manager and Executive Director of Samsung Electronics Co., Ltd., Seoul, Korea from January 1993 to December 1998. From October 1986 to December 1992, he was co-founder and President of Pixelab, Inc. of Lisle, Illinois. Mr. Yum has a BS degree in Electrical Engineering from Han Yang University of Seoul, Korea and an MS degree in Electrical Engineering from Illinois Institute of Technology.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's common stock is traded in the over-the-counter market and quoted on the NASD electronic bulletin board under the symbol "TELV.OB". The following table sets forth for the periods indicated the high and low last sales prices for the common stock. The prices quoted below reflect inter-dealer prices, without retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.

        On January 10, 2002 there were 739 holders of record of the Company's Common Stock and the closing price of the Company's common stock in the over-the-counter market was $0.13 per share.

        The Company has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company presently intends to retain any earnings for use in its business.

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ITEM 6. SELECTED FINANCIAL DATA

        The following selected financial data reflect the continuing operations of TeleVideo for the fiscal years ended October 31, 2001 through 1997. The data below has been derived from the Company's audited consolidated financial statements for the fiscal years presented and should be read in conjunction with such audited financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere herein.

(IN THOUSANDS, EXCEPT PER SHARE DATA)

        See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying Notes to Consolidated Financial Statements for a discussion of operating results, liquidity needs and acquisitions and dispositions during the periods.

(1)

Includes loss from investments of $4,781,000.



(2)

Includes net gains from the sales of C-NET stocks of $10,059,000.



(3)

Includes net loss from investment in APT venture of $4,076,903.



(4)

Includes net gains(loss) from the following (in thousands):

(5)

Amounts reflect restatement in 1998 to write off company's investment in Three H and TLK due to impairment in 1996 and 1997 respectively.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

        The Company continues to focus its efforts toward providing high-performance Windows-based terminals to the business and consumer markets. In recent years, the Company has phased out the sale of multimedia products and monitors to focus on utilizing its expertise in server-based network computing to forge new ground in delivering thin-client solutions. In November 1998, the Company launched its Windows-based terminal products.

        In August 2000 the Company acquired Promise Engineering, Inc., subsequently renamed TeleVideo Mobile Electronics Division which provides a channel for products produced by TeleVideo investees (Alpha and K&T). These products are represented by car accessories, which includes car alarms and hands-free phone accessories. The new product line did not have significant operations in 2000. In the fiscal 2001, due to the lower than expected sales activity for these products, the Company discontinued the production of car accessories products.

        The Company faces strong competition in the marketplace and continues to look for ways to improve operating efficiency. In order to lower the production costs, the Company has continued to negotiate with its suppliers and has also shifted many production processes overseas to subcontractors.

RESULTS OF OPERATIONS

FISCAL 2001 COMPARED TO FISCAL 2000

        Net sales for fiscal year 2001 were approximately $6.9 million, compared with $7.0 million in fiscal 2000, a decrease of $0.1 million, or 1.4%. In fiscal 2001, monitor and multimedia sales totaled $28,000 as compared with fiscal 2000, when sales of monitors and multimedia products totaled $58,000. Sales of terminals have decreased in fiscal 2001 to $3.3 million from $4.5 million in fiscal 2000, a decrease of 27%. This decrease reflects the Company focus on the sales of its new TeleClient, instead of the old terminals. The sales of TeleClient were approximately $3.3 million in the year 2001, compared with $2.1 million in the year 2000, an increase of 57%.

        Cost of sales for fiscal year 2001 was approximately $6.2 million, compared with $6.4 million in fiscal 2000, a decrease of $0.2 million, or 3%. Cost of sales as a percentage of net sales also decreased to 90% in 2001 from 92% in 2000. The decrease of cost of sales as a percentage of total sales in 2001, is due in principal to the increase in sales of TeleClient products with a greater margin than the terminals. In the fourth quarter of 2001, the Company recorded a $0.2 million expense for inventory obsolescence for certain of its computer monitors and safety auto devices in inventory at October 31, 2001

        Sales and marketing expenses for fiscal year 2001 were approximately $1.9 million compared with $2.5 million in fiscal 2000, a decrease of $0.6 million, or 24%. As a percentage of net sales, sales and marketing expenses decreased to 28% in fiscal 2001 from 36% in fiscal 2000. The decrease primarily represents the results of the Company's efforts to decrease all the categories of expenses. In the year 2000 the Company closed three of its five sales offices in United States.

        Research and development expenses were $0.8 million in fiscal 2001, compared with $0.9 million in fiscal 2000. As a percentage of net sales, research and development expenses decreased to 12% in fiscal 2001 compared with 13% in fiscal 2000. The decrease primarily represents the results of the Company's efforts to decrease all the categories of expenses. In the fiscal 2001 the personnel involved in research and development has decreased from 8 to 5 people, resulting in an important reduction in the salary expenses.

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        General and administrative expenses were $1.5 million in fiscal 2001, compared with $2.1 million in fiscal 2000, a decrease of $0.6 million or 29%. As a percentage of net sales, general and administrative expenses were 22% in fiscal 2001, compared with 30% in 2000. The decrease is due principally to the decrease in salary expenses.

        The Company's loss from operations was approximately $3.5 million in fiscal 2001 as compared with $4.9 million in fiscal 2000.

        Other expenses net of other income were $2.9 million in fiscal 2001 as compared with other income of $9.6 million in fiscal 2000. Other income in 2000 represents primarily the gain from CNET stock sales of approximately $10.1 million, partially offset by the write off of the investment in Mulix, an equity method investee, in the amount of $1.0 million. Other expenses in 2001 represents the loss from investments, recorded due to the decrease in the fair market value of these companies.

        The net loss for fiscal year 2001was approximately $6.5 million compared with a net income of $4.6 million in fiscal 2000, a decrease of $11.1 million, or 241%. This decrease is due to the loss from investments recorded in fiscal 2001 and to the gain from CNET stock sales recorded in fiscal 2000, partially offset by the decrease of loss from operations.

        An income tax of $0.1 million was recorded in fiscal 2000, as the Company was required to pay income taxes generated on sales of CNET stock. The Company's utilization of net operating loss carryovers was limited and therefore the gains on sales of CNET stock generated alternative minimum tax liability. No income tax was recorded for 2001. The Company has approximately $93.0 million in federal net operating loss and credit carryovers and approximately $5.0 million in state net operating loss carryovers to offset future federal and state corporate income tax liabilities. No net deferred tax asset has been recognized by the Company for any future tax benefit to be provided from the loss carry forwards since realization of any such benefit is not assured.

        Net loss per share in fiscal 2001 was $0.57 based on 11,310,000 weighted average shares outstanding, compared to a net income per share in fiscal 2000 of $0.41 based on 11,307,000 weighted average shares outstanding.

FISCAL 2000 COMPARED TO FISCAL 1999

        Net sales for fiscal year 2000 were approximately $7.0 million, compared with $8.1 million in fiscal 1999, a decrease of $1.1 million, or 14%. In fiscal 2000, monitor and multimedia sales totaled $58,000 as compared with fiscal 1999, when sales of monitors and multimedia products totaled $1.0 million. Sales of terminals have decreased in fiscal 2000 to $4.5 million from $6.0 million in fiscal 1999, a decrease of 25%. This decrease reflects the Company focus on the sales of its new TeleClient, instead of the old terminals. The sales of TeleClient were approximately $2.1 million in the year 2000, compared with $89,000 in the year 1999.

        Cost of sales for fiscal year 2000 was approximately $6.4 million, compared with $8.1 million in fiscal 1999, a decrease of $1.7 million, or 21%. Cost of sales as a percentage of net sales also decreased to 92% in 2000 from 100% in 1999. The decrease of cost of sales as a percentage of total sales in 2000, is due in principal to the decrease in sales of multimedia and monitors, products with a low gross margin and a $0.4 million expense for inventory obsolescence recorded during 1999.

        Sales and marketing expenses for fiscal year 2000 were approximately $2.5 million, compared with $2.2 million in fiscal 1999, an increase of $0.3 million, or 14%. As a percentage of net sales, sales and marketing expenses increased to 36% in fiscal 2000 from 27% in fiscal 1999. The increase primarily represents costs incurred by the Company for promoting its new TeleCLIENT product line.

        Research and development expenses were $0.9 million in fiscal 2000, compared with $0.6 million in fiscal 1999. As a percentage of net sales, research and development expenses increased to 13% in fiscal

17

2000 compared with 7% in fiscal 1999. The increase represents increased costs associated with the continued development of new products, including the Company's TeleCLIENT product line.

        General and administrative expenses were $2.1 million in fiscal 2000, compared with $1.8 million in fiscal 1999, an increase of $0.3 million or 17%. As a percentage of net sales, general and administrative expenses were 30% in fiscal 2000, compared with 22% in 1999. This increase is due principally to the write off of accounts receivable in the amount of over $0.4 million in 2000.

        The Company's loss from operations was approximately $4.9 million in fiscal 2000 as compared with $4.6 million in fiscal 1999.

        Other income was $9.6 million in fiscal 2000 as compared with $0.5 million in fiscal 1999. Other income represents primarily the gain from CNET stock sales of approximately $10.1 million, partially offset by the write off of the investment in Mulix, an equity method investee, in the amount of $1.0 million.

        The net income for fiscal year 2000 was approximately $4.6 million, compared with a net loss of $3.7 million in fiscal 1999, an increase of $8.3 million, or 224%. This increase is due to the gain from CNET stock sales, partially offset by the loss from operations.

        An income tax of $0.1 million was recorded in fiscal 2000, as the Company was required to pay income taxes generated on sale of CNET stock. The Company's utilization of net operating loss carryovers was limited and therefore the gains on sales from CNET stock generated alternative minimum tax liability. The Company has approximately $90.0 million in federal net operating loss and credit carryovers and approximately $5.0 million in state net operating loss carryovers to offset future federal and state corporate income tax liabilities. No net deferred tax asset has been recognized by the Company for any future tax benefit to be provided from the loss carry forwards since realization of any such benefit is not assured.

        Net income per share in fiscal 2000 was $0.41 based on 11,307,000 weighted average shares outstanding, compared to a net loss per share in fiscal 1999 of ($0.33) based on 11,271,000 weighted average shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

        At October 31, 2001, the Company had $0.9 million in cash and cash equivalents versus $3.3 million at October 31, 2000. The decrease is due in principal to the investments in affiliates and to the loss from operations in fiscal 2001.

        In March 2000, the Company received approximately 375,000 shares of CNET common stock when CNET acquired the Internet company, mySimon, an investment made in 1998. During the fiscal year 2000, TeleVideo sold approximately 335,000 shares of CNET stock, the proceeds of which aggregated $10,953,000. During the fiscal year 2001 the Company sold approximately 7,000 shares of CNET stock for approximately $0.3 million.

        In December 1998, the Company sold its 69,360 square foot headquarters building in San Jose, California, including land and improvements, to TVCA, LLC, an unaffiliated Delaware limited liability company ("TVCA") for $11.0 million. The nature of the consideration was $8.25 million in cash and a $2.75 million promissory note. The note bears interest at 7.25% per annum. Principal and accrued interest are payable in equal monthly installments of $21,735 on the first day of each month, commencing January 1, 1999. If not earlier paid in full, any unpaid principal and all accrued interest is due and payable to the Company on December 1, 2018.

        The Company concurrently leased back this facility over a 15-year lease term expiring in December 2013. The land component has been recorded as an operating leaseback. The building component has been accounted for as a capital lease, whereby a leased building asset and capital lease

18

obligation was recorded at the fair value of approximately $6.27 million. Accumulated amortization on the building as of October 31, 2001 and 2000 was $1.2 million and $0.79 million, respectively. As a result of the sale for $11.0 million, a deferred gain of approximately $8.0 million was recorded. The deferred gain attributable to the land element, which approximates $3.44 million, is being amortized over the 15-year lease life on the straight-line method. The deferred gain attributable to the building element, which approximates $4.56 million, is being amortized over the leased building asset life, which has been determined to be the 15-year lease term, on a straight-line method.

        In December 2000, the Company entered into a lease agreement to sublease a portion of its main facility. The operating sublease provides that the sublessee pay taxes, maintenance, insurance and other occupancy expense applicable to the subleased premises. The remaining minimum sublease rental commitments, under operating subleases are $1,014,000 for the year 2002 and $1,055,000 for the year 2003.

        In February 2001, the Company borrowed approximately $375,000 from Salomon Smith Barney, a member of Citigroup, money used for regular operations expenses. This loan was secured with the 39,508 Company's CNET shares of stock. In April 2001, due to the decrease in stock price, the Company was requested to pay off a portion of the loan and, consequently, we sold approximately 7,000 of shares of CNET stock.

        Because the stock price decreased again, we were required to pay off another portion of this loan. The Company decided not to sell shares, and we borrowed approximately $200,000 from Gem Management, Inc., a company owned by the majority shareholder's spouse, Gemma Hwang. The unsecured loan bears annual interest at a prime rate with principal and interest due when the Company will receive the next payment of $450,000 from the contract with Ningbo China.

        Working capital at the end of the fiscal 2001 was approximately $1.5 million, a decrease of $3.4 million, or 70%, from the fiscal 2000 year-end level of approximately $4.9 million, primarily as a result of the investments in affiliates made during the fiscal year 2001 and the loss from operations.

        The Company believes that, with respect to its current operations, the Company's cash balance of approximately $0.9 million at October 31, 2001, plus revenues from operations and other non-operating cash receipts, will be sufficient to meet the Company's working capital and capital expenditure needs for the next twelve months. In addition, the credit line from Gem Management has an unused balance of approximately $2.0 million, money that can be obtained as needed.

        Operating and non-operating cash receipts for the next twelve months will be from the following: cash return from investments in NINGBO China, rental income from the subleasing of a part of headquarter space, notes receivable and Gem Management loan.

        In May 2001 the Company obtained a line of credit from Gem Management in amount of $3.5 million, including the previous loan of $200,000. The Company can borrow money under this line of credit when needed, in order to assure the continuity of the operations. In consideration of Gemma Hwang loan to the Company, the Company pleads and grants to Gemma Hwang a secured interest in the following described property:

a)

15,278 shares of the common stock of Xeline (Keyin Telecom);



b)

45,000 shares of the common stock of Biomax;



c)

285,714 shares of the common stock of Synertech;



d)

30% from the TeleVideo Ningbo China equity, equivalent to 30% of the outstanding shares of this company;



e)

any and all intellectual property of TeleVideo, including but not limited to patents, hardware and software engineering documents;

19

f)

any and all trademarks, trade names and intangible assets of TeleVideo.

        Under this line of credit, which bears interest at 8% per annum, payable monthly, the Company received $300,000 in June, $500,000 in July, $500,000 in September and $500,000 in December 2001. In November 2001 the Company paid back approximately $500,000 from this loan by giving in exchange its interest in Alpha Technology and the proceeds from Koram investment. On January 10, 2001 the outstanding balance for this loan was approximately $1,500,000.

FACTORS THAT MAY AFFECT FUTURE RESULTS

COMPETITIVE MARKETS

        The terminal market is intensely competitive. The principal elements of competition are pricing, product quality and reliability, price/performance characteristics, compatibility, marketing and distribution capability, service and support, and reputation of the manufacturer. TeleVideo competes with a large number of manufacturers, most of which have significantly greater financial, marketing and technological resources than TeleVideo. There can be no assurance that the Company will be able to continue to compete effectively.

PRODUCT DEVELOPMENT

        The computer market is characterized by rapid technological change and product obsolescence, often resulting in short product life cycles and rapid price declines. The Company's success will continue to depend primarily on its ability to continue to reduce costs through manufacturing efficiencies and price negotiation with suppliers, the continued market acceptance of its existing products and its ability to develop and introduce new products. There can be no assurance that TeleVideo will successfully develop new products or that the new products it develops will be introduced in a timely manner and receive substantial market acceptance. There can also be no assurance that product transitions will be managed in such a way to minimize inventory levels and product obsolescence of discontinued products. The Company's operating results could be adversely affected if TeleVideo is unable to manage all aspects of product transitions successfully.

SINGLE SOURCED PRODUCTS

        The Company generally utilizes standard parts and components available from multiple suppliers. However, certain parts and components used in the Company's products are obtained from a single source. If contrary to its expectations, the Company is unable to obtain sufficient quantities of any single-sourced components, the Company will experience delays in product shipments.

RELIANCE ON FORECASTS

        The Company offers its products through various channels of distribution. Changes in the financial condition of, or in the Company's relationship with, its distributors could cause actual operating results to vary from those expected. Also, the Company's customers generally order products on an as-needed basis. Therefore, virtually all product shipments in a given fiscal quarter result from orders received in that quarter. The Company anticipates that the rate of new orders will vary significantly from month to month. The Company's manufacturing plans and expenditure levels are based primarily on sales forecasts. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenditure and inventory levels could be disproportionately high and the Company's operating results for that quarter, and potentially future quarters, would be adversely affected.

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FACTORS THAT COULD AFFECT STOCK PRICE

        The market price of TeleVideo's common stock could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the computer technology industry, as well as general economic conditions and other factors external to the Company. In fiscal 2001, the highest price for TeleVideo shares of stock was $0.55, and the lowest price was $0.13.

FOREIGN CURRENCY AND POLITICAL RISK

        The Company markets its products worldwide. In addition, a large portion of the Company's part and component manufacturing, along with key suppliers, are located outside the United States. Accordingly, the Company's future results could be adversely affected by a variety of factors, including without limitation, fluctuation in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, unexpected changes in regulatory requirements and natural disasters.

INVESTMENTS IN AFFILIATES

        Investments in affiliates represent approximately 18% of the Company's total assets at October 31, 2001. As a result, the Company's success will be adversely affected if the investees fail to execute their business plans. If there is an impairment in the carrying value of the affiliate investments the Company will reduce the carrying value of such investments. During the fiscal year 2001, the Company has decreased the carrying value of its investments with approximately $4.8 million ($3.8 million from impairment losses and $1.0 million from equity in affiliate losses).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company believes that its exposure to market risk for changes in interest rates is not significant because the Company's investments are limited to highly liquid instruments with maturities of three months or less. At October 31, 2001, the Company has approximately $0.9 million classified as cash and equivalents. The Company is also subject to equity price risk related to its investments in marketable securities. At October 31, 2001, the Company owned approximately 32,508 shares of CNET common stock. As of October 31, 2001, the estimated fair value of these marketable securities was approximately $160,000. All of the Company's transactions with international customers and suppliers are denominated in US dollars.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

21

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
TeleVideo, Inc.

        We have audited the accompanying consolidated balance sheet of TeleVideo, Inc. and Subsidiaries as of October 31, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TeleVideo, Inc. and Subsidiaries as of October 31, 2001, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Choi, Cho & Ahn Accountancy Corporation

San Jose, California
January 10, 2002

22

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
TeleVideo, Inc.

        We have audited the accompanying consolidated balance sheets of TeleVideo, Inc. and Subsidiaries as of October 31, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended October 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TeleVideo, Inc. and Subsidiaries as of October 31, 2000, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

San Jose, California
January 11, 2001

23

TELEVIDEO, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

The accompanying notes are an integral part of these financial statements.

24

TELEVIDEO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

The accompanying notes are an integral part of these financial statements.

25

TELEVIDEO, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands)

Three Years Ended

October 31, 2001

The accompanying notes are an integral part of this financial statement.

26

TELEVIDEO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

The accompanying notes are an integral part of these financial statements.

27

NOTE 1—SUMMARY OF SIGNIFIANT ACCOUNTING POLICIES

THE COMPANY

        Founded in 1975, TeleVideo, Inc. is a market leader providing innovative high performance terminal and network computer products to the business and consumer markets. The Company markets its products worldwide primarily through distributors, value-added resellers ("VARs"), systems integrators and original equipment manufacturers ("OEMs").

PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, after elimination of inter-company accounts and transactions.

CASH AND CASH EQUIVALENTS

        The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

INVENTORIES

        Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard cost basis (which approximates average cost) for both finished goods and work-in-process and includes material, labor and manufacturing overhead costs. Amounts shown are net of reserves for obsolescence of $0.7 million and $0.5 million as of October 31, 2001 and 2000, respectively: (in thousands)

MARKETABLE SECURITIES

        Investments in marketable equity and debt securities are classified as available-for-sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are securities not classified as either trading or held-to-maturity. Securities available-for-sale are reported at fair value with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss) in stockholders' equity. Premiums and discounts are included in interest income over the period to maturity using the interest method. Gains and losses on sale are determined using the specific identification method.

PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided over the estimated useful lives of the assets using both

28

straight-line and accelerated methods. Leasehold improvements and property under capital lease are amortized over the shorter of the lease term or economic life of the asset.

INVESTMENTS IN AFFILIATES

        Investments in affiliated companies, owned 20% or more, are accounted for on the equity method. Accordingly, consolidated net income includes the Company's share of their net earnings. Investments of less than 20% are carried at cost. The Company makes periodic evaluations of the recoverability of its investments in affiliates based upon internal and external events effecting expected realization of the Company's investment.

REVENUE RECOGNITION

        The Company recognizes revenue when products are shipped. The Company performs periodic evaluations of its customers' financial condition and maintains a reserve for potential credit losses and adjusts the reserve periodically to reflect both actual and potential credit losses. In addition, such allowances provide for returns resulting from stock balancing agreements and price protection programs. Product warranties are based on the ongoing assessment of actual warranty expenses incurred.

ADVERTISING COSTS

        Advertising costs are expensed as incurred. Advertising expense totaled approximately $0.3 million in fiscal 2001, approximately $0.2 million in fiscal 2000 and $0.7 million in fiscal 1999.

RESEARCH AND DEVELOPMENT COSTS

        Costs incurred for the development and enhancement of new products and services are charged to expense as incurred.

INCOME TAXES

        The Company accounts for income taxes using the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"). Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

STOCK-BASED COMPENSATION

        The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees. Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the exercise price.

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SEGMENT REPORTING

        The Company's business is conducted in a single operating segment. The Company's Chief Executive Officer reviews a single set of financial data that encompasses the Company's entire operations for purposes of making operating decisions and assessing performance.

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

        Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects potential dilution from outstanding stock options using the treasury stock method. Potentially dilutive securities are excluded from the earnings per share calculations when their inclusion would be anti-dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The fair value of cash and cash equivalents, accounts receivable and trade payables approximates carrying value due to the short-term nature of such instruments. The fair value of notes receivable is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. The carrying amount and estimated fair value of notes receivable as of October 31, 2001 was approximately $2,600,000 and $2,900,000, respectively. The carrying amount and estimated fair value of notes receivable as of October 31, 2000 was approximately $2,600,000 and $2,300,000, respectively. The fair value of investment securities is based on quoted market prices, if available.

USE OF ESTIMATES

        In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results could differ from those estimates.

RECLASIFICATIONS

        Certain reclassifications have been made to conform to the 2001 presentation, including changes which effect comparability of the annual financial information to previously filed quarterly information. None of such reclassifications are material to the financial statements taken as a whole.

NOTE 2—REALIZATION OF ASSETS

        The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company's has sustained recurring losses from operations and used cash in operations for each of the three years ended October 31, 2001, and had an accumulated deficit of $95,489,000 and $89,025,000 as of October 31, 2001 and 2000, respectively.

        In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying financial statements is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, and to succeed in its future operations. In order for operations to continue through October 31, 2002, the Company may need to reduce operating

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expenses, sell its investment in marketable securities or raise additional capital through debt or equity financing. The ultimate success of the Company will depend on increasing revenues and generating income from operations.

        The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 3—MARKETABLE SECURITIES

        The amortized cost, unrealized gains and losses, and fair values of the Company's available-for-sale securities held at October 31, 2001 are summarized as follows: (in thousands)

        Proceeds on sales of securities classified as available-for-sale were $10,953,000 in 2000. Gains of $10,059,000 were realized on these sales.

        In the fiscal 2001, proceeds on sales of securities classified as available-for-sale were $290,000 and the gains from sales of these securities were $265,000.

NOTE 4—INVESTMENTS IN AFFILIATES

        Equity Method

Applied Photonics Technology, Inc.

On April 16, 1997, the Company entered into a Common Stock Purchase agreement with Applied Photonics Technology, Inc. (APT), a California corporation, whereby the Company purchased a 30% interest in APT for $3.0 million. Founded in October 1996, APT is a developmental stage enterprise specializing in the development of electronic display technology.

During the fiscal year ended October 31, 1998, the Company wrote off its equity investment, related goodwill, and note receivable of approximately $4.1 million. During 1999, the Company granted and wrote off loans and advances to APT totaling $426,000. The Company has not guaranteed any obligations of APT and has made no commitments to provide additional financial support to APT.

Mulix, Inc.

In February 2000, the Company purchased for $1,000,000 in cash an aggregate of 14,269,230 shares of unregistered Series A Convertible Preferred Stock of Mulix, Inc. ("Mulix"), a Delaware corporation. The Company's investment in Mulix represents a 35% interest in this privately-held corporation. The investment was accounted for using the equity method of accounting. Mulix was dissolved as effective November 30, 2000. Thus, the entire investment was written off as of October 31, 2000.

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K&T Telecom, Inc.

In July 2000, the Company purchased for $600,000 in cash an aggregate of 9,608 shares of Stock of K&T Telecom, Inc. The Company's investment in K&T Telecom, Inc. represents a 49% interest in this privately-held corporation whose primary operations include manufacturing telecommunications and electronics devices (hands-free phones accessories and collision sensors).

Alpha Technology, Inc.

In August 2000, the Company purchased for $650,000 in cash an aggregate of 9,608 shares of Stock of Alpha Technology, Inc. The Company's investment in Alpha Technology, Inc. represents a 49% interest in this privately-held corporation whose primary operations include manufacturing electronics and car accessories (two way car alarm systems). The Company's interest in Alpha Technology was used in November 2001 to pay off approximately $418,000 (the book value as of July 31, 2001) of the loan from Gem Management, a related entity owned by the chief executive officer's spouse.

Ningbo China

In October 2000, the Company invested $1,000,000 in Televideo (China) Co., Ltd. (Ningbo China) for a 10% interest. The Company invested an additional $2,000,000 in December 2000. The total investment will represent a 30% interest in this entity. This investment is accounted for using the equity method at October 31, 2001.

The investment agreement also provides for the use of Televideo's technologies and production skill for terminal products by Ningbo China that will pay $2.5 million for these technologies. During the fiscal 2001, the Company received $1.4 million from Ningbo, and the difference of $1.1 million will be paid in 2002 and 2003.

In the third quarter of fiscal 2001, because two of investors have withdrawn from this joint venture, the capital of Ningbo was decreased to around $5.0 million, from an initial amount of 10.0 million. Due to this fact, the Chinese government asked Ningbo to change the initial agreement with TeleVideo and to record the payments made by Ningbo to TeleVideo as withdrawal of investment, instead of payments for the technology and training. The Company agreed with this change, and, consequently, we have reduced the amount showed as investment on the financial statements from $3.0 million to $1.5 million as of October 31, 2001.

Cost Method

mySimon, Inc.

In September 1998, the Company invested $1 million in the online comparison shopping Internet company, mySimon, Inc., receiving convertible preferred stock.

In February 2000, CNET Networks, Inc. (formerly, CNET, Inc.) completed the acquisition of mySimon, Inc. As a result of this acquisition, the Company received 375,108 shares of common stock of CNET Networks, Inc. ("CNET") in exchange for 100% of its interest in mySimon, Inc. During 2000, the cost method used to book the investment in mySimon was changed to the market value method in accordance with SFAS 115 to record the investment in CNET stock.

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Koram Inc.

On March 3, 1997, the Company deposited $224,820 in escrow in Korea, to purchase a 50% ownership in Koram, Inc. ("Koram"), a restaurant venture in Seoul, Korea. In February 1998, the Company completed its purchase of a 50% interest in Koram. The Company's investment was written down to $109,820 during 1997, due to the devaluation of the Korean won. During 2000, the Company decided to discontinue it participation in this joint venture and entered into an agreement with its venture partner whereby the venture partner will pay the market value for the Company's 50% interest. As such the Company accounts for this investment under the cost method of accounting. This investment was previously accounted for under the equity method of accounting.

Biomax Co., Ltd.

In May 2000, the Company purchased for a cash investment of $917,431 an aggregate of 45,000 ordinary shares of Biomax Co., Ltd. ("Biomax"). Biomax is a startup company with its principal offices located in Seoul, Korea, which is engaged in developing an herbal product to help lower cholesterol levels in humans. The Company's investment in Biomax represents a 15% interest in this privately held corporation. The investment is accounted for on the cost method of accounting.

Xeline Telecom Co., Ltd.

In May 2000, the Company purchased for $2,522,972 in cash an aggregate of 15,278 ordinary shares of Xeline Telecom Co. Ltd. ("Xeline"). Xeline is a private company located in Seoul, Korea, which is engaged in developing powerline communications technology. The Company's investment in Xeline represents a 5.75% interest in this corporation. The investment is accounted for using the cost method of accounting.

Synertek, Inc.

In June 2000, the Company purchased for $1,000,000 in cash an aggregate of 285,714 shares of common stock of Synertek, Inc., a Nevada corporation, representing an 8% interest in this company. Synertek, Inc. manufactures and sells handheld digital multimedia and communications appliances. The investment is accounted for using the cost method of accounting.

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A summary of the changes in the Company's investments in affiliates for the two years ended October 31, 2001 follows: (in thousands)

NOTE 5—ACQUISITION

Promise Engineering, Inc. ("PEI")

In August 2000, the Company acquired Promise Engineering, Inc., a Washington corporation for $316,433. After acquisition, PEI was renamed Televideo Mobile Electronics Division ("TMED"). PEI was a research and development company, focused on cooling and heating car systems. Televideo paid cash of $166,433 Televideo further warrants to PEI that Televideo will issue, transfer and convey to a former officer of PEI, now an employee of TMED ("TMED Employee"), one hundred thousand (100,000) shares of the common stock of Televideo and will pay the difference of $150,000 in the event of annual sales revenue of TMED reaches $10,000,000 in any 12 month period. However, Televideo may issue, transfer and convey to TMED Employee the first 100,000 shares collectively within six months of the establishment of TMED if in the sole opinion of Chairman and CEO, Dr. K. Philip Hwang, TMED Employee's performance is satisfactory and acceptable. A second block of 100,000 shares of the common stock of Televideo shall be issued, transferred and conveyed to TMED Employee if the annual sales revenue of TMED reaches $20,000,000 in any 12 month period. When computing sales revenue of $20,000,000, the $10,000,000 sales revenue referred above shall be included. If TMED executes a non-cancelable, non-revocable procurement agreement with Cartell, Inc. with a minimum term of three (3) or more years and the first manufacturing product shipment is accepted by Cartell, Inc. then, within thirty (30) days of the said acceptance, an additional nine hundred thousand (900,000) shares of common stock of Televideo shall be transferred and conveyed to TMED Employee.

Due to the high level of competition on the market of these products, the Company didn't meet its goals regarding sales revenue expected for the first two quarters of fiscal 2001. Consequently, in the third quarter of the fiscal 2001 we discontinued the production of auto safety devices.

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NOTE 6—VALUATION AND QUALIFYING ACCOUNTS

The Company's reserves for doubtful accounts receivable, inventory obsolescence and deferred tax assets consist of the following: (in thousands)

NOTE 7—ACCRUED LIABILITIES

Accrued liabilities consist of the following at October 31: (in thousands)

NOTE 8—LETTER OF CREDIT AND LINE OF CREDIT AGREEMENTS

The Company had a letter of credit agreement with a bank whereby the bank will issue up to a total of $1.0 million of standby and sight letters of credit. These agreements were contingent upon the Company maintaining deposits in a money market account at the bank as collateral in a total amount no less than the outstanding borrowings.

During the fiscal 2001 the Company closed its letter of credit agreement. At October 31, 2001, the Company had no letters of credit outstanding.

In May 2001 the Company obtained a line of credit from Gem Management in amount of $3.5 million, including the previous loan of $200,000. The Company can borrow money under this line of credit when needed, in order to assure the continuity of the operations. In consideration of Gemma Hwang loan to the Company, the Company pleads and grants to Gemma Hwang a secured interest in the following described property:

a)

15,278 shares of the common stock of Xeline (Keyin Telecom);

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b)

45,000 shares of the common stock of Biomax;



c)

285,714 shares of the common stock of Synertech;



d)

30% from the TeleVideo Ningbo China equity, equivalent to 30% of the outstanding shares of TeleVideo Ningbo China;



e)

any and all intellectual property of TeleVideo, including but not limited to patents, hardware and software engineering documents;



f)

any and all trademarks, trade names and intangible assets of TeleVideo.

Under this line of credit, which bears interest at 8% per annum, payable monthly, the Company received $300,000 in June, $500,000 in July, $500,000 in September and $500,000 in December 2001. In November 2001 the Company paid back approximately $500,000 from this loan by giving in exchange its interest in Alpha Technology and the proceeds from Koram investment. On January 10, 2001 the outstanding balance for this loan was approximately $1,500,000.

NOTE 9—SALE AND LEASEBACK OF BUILDING

In December 1998, the Company sold its main facility (land and building) for approximately $11.0 million and concurrently leased back this facility over a 15-year lease term expiring in December 2013. The land component has been recorded as an operating lease. The building component has been accounted for as a capital lease, whereby a leased building asset and capital lease obligation were recorded at the fair value of approximately $6.27 million. Accumulated amortization on the building as of October 31, 2001 and 2000 was $1.1 million and $0.77 million, respectively. As a result of the sale for $11.0 million (which includes a $2.75 million note receivable), a deferred gain of approximately $8.0 million was recorded. The deferred gain attributable to the land element, which approximates $3.44 million, is being amortized over the 15-year lease life on a straight-line method. The deferred gain attributable to the building element, which approximates $4.56 million, is being amortized over leased building asset life, which has been determined to be the 15 year lease term, on a straight line method. The aggregate monthly lease payments are $104,000. These payments escalate to $126,000 through 2013.

Future aggregate minimum lease payments are as follows: (in thousands)

The $2.75 million note receivable bears interest at 7.25% per annum. Principal and accrued interest is payable in equal monthly installments of $21,735 each on the first day of each month, which the Company began receiving on January 1, 1999. If not earlier paid in full, unpaid principal and accrued interest shall be due and payable to TeleVideo, Inc. on December 1, 2018.

In December 2000, the Company subleased a part of it's headquarter space. The leasing agreement is for a period of three years, beginning January 2001 with a monthly rent amount of approximately $81,000. This sublease will not affect the Company's manufacturing facilities.

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Under the lease agreement, the sublessee is required to open a standby letter of credit in the TeleVideo favor in amount of $500,000. The letter of credit has an initial term of one year, beginning January 2001, and this term will be automatically extended until the end of the leasing contract, which is January 10, 2004.

NOTE 10—CAPITAL STOCK

The Company effected a 4-for-1 reverse stock split of its outstanding common stock on April 23, 1998. All shares and per share amounts have been retroactively adjusted for such reverse stock split.

Preferred Stock

The Company has authorized 3,000,000 shares of preferred stock. No preferred stock has been issued to date.

Stock Option Plans

The Company has one stock option plan, the 1991 ISO Plan ("1991 ISO Plan") accounted for under the APB Opinion 25 and related interpretations. The 1991 ISO Plan provides for the granting of incentive options to employees, including officers, for up to 4,000,000 shares. The outstanding options have a term of ten years when issued and vest over five years. The exercise price of each option equals the market price of the Company's stock on the date of grant. Accordingly, no compensation cost has been recognized for any grants under the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net income (loss) and net income (loss) per share would have been changed to the pro forma amounts indicated below. Pro forma results may not be indicative of the pro forma results in the future periods.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999 respectively: no expected dividends; weighted average risk-free interest rate of 6.13%, 6.13% and 6.00%; stock volatility 150%, 150% and 219%; and expected lives of 10 years. The weighted average fair value of options granted were $0.15, $1.12 and $0.84 in 2001, 2000 and 1999, respectively.

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A summary of the status of the Company's stock option plans as of October 31, 2001, and changes during the three years ending October 31, 2001 is presented below: