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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------

FORM 10-Q

--------------------

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

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 000-29053

TELAXIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

MASSACHUSETTS 04-2751645
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

20 INDUSTRIAL DRIVE EAST
SOUTH DEERFIELD, MA 01373
(Address of principal executive offices)

(413) 665-8551
(Registrant's telephone number, including area code)

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 [ ]

As of July 31, 2002, there were 16,708,313 shares of the registrant's
common stock outstanding.






INDEX


PAGE NO.
----------
PART I. FINANCIAL INFORMATION


Item 1. Financial Statements............................................ 2

Condensed Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001..................................... 3

Condensed Statements of Operations for the three months and
six months ended June 30, 2002 and 2001 (unaudited)....... 4

Condensed Statement of Changes in Stockholders' Equity for
the six months ended June 30, 2002 (unaudited)............ 5

Condensed Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited)........................ 6

Notes to Financial Statements (unaudited)................... 7

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9

Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 14

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................... 14

Item 2. Changes in Securities and Use of Proceeds....................... 15

Item 4. Submission of Matters to a Vote of Security Holders............. 15

Item 5. Other Information............................................... 15

Item 6. Exhibits and Reports on Form 8-K................................ 15

SIGNATURES................................................................... 16



1



PART I - FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws. Forward-looking statements are predictions
that relate to future events or our future performance and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, outcomes, levels of activity, performance, developments, or
achievements to be materially different from any future results, outcomes,
levels of activity, performance, developments, or achievements expressed,
anticipated, or implied by these forward-looking statements. Forward-looking
statements should be read in light of the cautionary statements and important
factors described in this Form 10-Q, including Part I, Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Safe
Harbor for Forward-Looking Statements. We undertake no obligation to update or
revise any forward-looking statement to reflect events, circumstances, or new
information after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events.


Item 1. Financial Statements.



2







TELAXIS COMMUNICATIONS CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share data)

June 30, December 31,
2002 2001
-------------- ------------
(unaudited)

Assets
Current assets
Cash and cash equivalents ......................................................... $ 10,121 $ 15,875
Restricted cash ................................................................... 599 --
Marketable securities ............................................................. 6,132 5,588
Trade accounts receivable, less allowance for doubtful accounts ($0 in 2002 and
$250 in 2001)...................................................................... 2 438
Other accounts receivable ......................................................... 2 154
Note receivable, less allowance of $210 in 2001 ................................... -- 1,000
Inventories ....................................................................... 313 129
Assets held for sale .............................................................. 950 1,659
Other current assets .............................................................. 152 102
--------- ---------

Total current assets ............................................................ 18,271 24,945
--------- ---------
Property, plant and equipment, net ................................................ 3,821 4,668
Other assets ...................................................................... 76 79
--------- ---------

Total assets .................................................................... $ 22,168 $ 29,692
========= =========

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .................................................................. $ 269 $ 169
Accrued expenses .................................................................. 740 803
Accrued restructuring costs ....................................................... 896 1,298
Current maturities of long-term debt .............................................. 696 562
Current maturities of capital lease obligations ................................... 1,578 1,912
--------- ---------

Total current liabilities ....................................................... 4,179 4,744
--------- ---------
Long-term debt .................................................................... 210 618
Capital lease obligations ......................................................... 316 956
--------- ---------

Total liabilities ............................................................... 4,705 6,318
--------- ---------

Commitments and contingencies

Stockholders' Equity
Preferred stock, $.01 par value; authorized 4,500,000 shares in 2002 and 2001
none issued....................................................................... -- --
Common stock, $.01 par value; authorized 100,000,000 shares in 2002 and 2001;
issued 16,820,813 shares, outstanding 16,708,313 shares in 2002 (16,743,198
issued and 16,630,698 outstanding in 2001)........................................ 168 167
Additional paid-in capital ........................................................ 124,700 124,623
Accumulated comprehensive (loss) income ........................................... (5) 4
Notes receivable .................................................................. (3) (3)
Treasury stock, at cost (112,500 shares) .......................................... (37) (37)
Accumulated deficit ............................................................... (107,360) (101,380)
--------- ---------

Total stockholders' equity ...................................................... 17,463 23,374
--------- ---------

Total liabilities and stockholders' equity ...................................... $ 22,168 $ 29,692
========= =========



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


3






TELAXIS COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)





Three months ended June 30, Six months ended June 30,
------------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)

Sales ........................................................... $ 8 $ 968 $ 13 $ 1,490
Cost of sales ................................................... 868 2,137 1,666 4,223
-------- -------- -------- --------

Gross margin (loss) ............................................. (860) (1,169) (1,653) (2,733)
Operating expenses
Research and development, net .............................. 1,079 1,832 2,200 3,827
Selling, general and administrative ........................ 1,678 1,724 3,119 3,716
Restructuring costs ........................................ 461 -- 461 --
-------- -------- -------- --------

Total operating expenses ................................. 3,218 3,556 5,780 7,543
-------- -------- -------- --------

Operating loss .................................................. (4,078) (4,725) (7,433) (10,276)
-------- -------- -------- --------

Other income (expense)
Interest and other expense ................................. (93) (144) (198) (320)
Income from settlement of litigation ....................... -- -- 1,223 --
Interest and other income .................................. 134 427 428 1,051
-------- -------- -------- --------

Total other income ....................................... 41 283 1,453 731
-------- -------- -------- --------


Loss before income taxes ........................................ (4,037) (4,442) (5,980) (9,545)
Income taxes .................................................... -- -- -- --
-------- -------- -------- --------

Net loss ........................................................ $ (4,037) $ (4,442) $ (5,980) $ (9,545)

======== ======== ======== ========


Basic and diluted net loss per share ............................ $ (0.24) $ (0.27) $ (0.36) $ (0.57)
======== ======== ======== ========


Shares used in computing basic and diluted net loss per share.... 16,708 16,743 16,688 16,741
======== ======== ======== ========





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

4







TELAXIS COMMUNICATIONS CORPORATION
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(in thousands, except share data)
(unaudited)


Accumulated
Common Stock Additional Common Other
-------------------- Paid-in Accumulated Notes Stock in Comprehensive
Shares Amount Capital Deficit Receivable Treasury (Loss) Income Total
------ ------ ------- ------- ---------- --------- ------------- -----

Balances, January 1, 2002.... 16,743,198 $ 167 $ 124,623 $ (101,380) $ (3) $ (37) $ 4 $ 23,374

Common stock grants ......... 34,091 -- 29 -- -- -- -- 29
Stock compensation expense .. -- -- 15 -- -- -- -- 15
Exercise of common stock
options ................... 43,524 1 33 -- -- -- -- 34
Purchase of treasury stock .. -- -- -- -- -- -- -- --
Other ....................... -- -- -- -- -- -- -- --
Comprehensive loss:
Net loss ................. -- -- -- (5,980) -- -- -- (5,980)
Unrealized loss on
investments ............. -- -- -- -- -- -- (9) (9)
---------- ------- ---------- ---------- ------ ------ ------ --------
Balances, June 30, 2002 ..... 16,820,813 $ 168 $ 124,700 $ (107,360) $ (3) $ (37) $ (5) $ 17,463
========== ======= ========== ========== ====== ====== ====== ========






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

5






TELAXIS COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)


Six months ended June 30,
------------------------
2002 2001
-------- --------
(unaudited) (unaudited)

Cash flows from operating activities
Net loss ......................................................................... $ (5,980) $ (9,545)
Adjustments to reconcile net loss to net cash utilized by operating activities:
Depreciation and amortization .................................................. 1,082 2,258
Non-cash restructuring costs ................................................... 461 --
Non-cash compensation expense .................................................. 15 23
Changes in assets and liabilities
Trade accounts receivable .................................................... 436 1,825
Other accounts receivable .................................................... 152 207
Inventories .................................................................. (184) 105
Other current assets ......................................................... (50) 39
Accounts payable and accrued expenses ........................................ 37 (4,087)
Customer prepayments ......................................................... -- (38)
Accrued restructuring costs................................................... (354) --
-------- --------
Net cash utilized by operating activities .................................... (4,385) (9,213)
-------- --------

Cash flows from investing activities
Purchase of marketable securities ................................................ (9,064) (12,650)
Sale of marketable securities .................................................... 8,511 21,831
Additions to property and equipment .............................................. (225) (343)
Proceeds from sale of assets ..................................................... 200 --
Repayment of note receivable ..................................................... 1,000 --
Reduction to other assets ........................................................ 3 29
-------- --------
Net cash provided by investing activities .................................... 425 8,867
-------- --------

Cash flows from financing activities
Transfer of restricted cash ...................................................... (599) (1,000)
Proceeds from capital lease obligations .......................................... -- 569
Repayments of long-term debt and capital lease obligations ....................... (1,258) (1,360)
Issuance of common stock upon exercise of options and warrants ................... 63 8
Repayments of notes receivable ................................................... -- 46
-------- --------

Net cash utilized by financing activities .................................... (1,794) (1,737)
-------- --------

Net decrease in cash and cash equivalents ........................................... (5,754) (2,083)
Cash and cash equivalents at beginning of period .................................... 15,875 27,865
-------- --------
Cash and cash equivalents at end of period .......................................... $ 10,121 $ 25,782
======== ========
Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Equipment acquired under capital lease agreement ............................... $ -- $ 807
Unrealized loss on investments ................................................. (9) 2





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

6




TELAXIS COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies

Basis of Presentation

The financial information as of June 30, 2002 and for the three months and
six months ended June 30, 2002 and 2001 is unaudited. In the opinion of
management, such interim financial information includes all adjustments,
including an additional restructuring charge as well as normal recurring
adjustments, necessary for a fair presentation of the results for such interim
periods. The financial statements do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The statements should be
read in conjunction with the financial statements and footnotes as of and for
the year ended December 31, 2001 included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission. The December 31, 2001
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. The results of operations for the three months and
six months ended June 30, 2002 are not necessarily indicative of the results to
be expected for any future period.

Marketable Securities

The Company has invested the proceeds from its initial public offering in
accordance with its corporate cash management policy. Marketable securities are
classified as available for sale and are carried at cost plus accrued interest,
which approximates fair value. The Company's investments consist of short-term,
interest bearing, investment grade securities or direct or guaranteed
obligations of the U.S. government. At June 30, 2002, all of the Company's
securities, valued at $6.1 million, mature within thirteen months.

Comprehensive Loss

Comprehensive loss is defined as changes in equity other than from
transactions resulting from investments by owners and distributions to owners.
The Company's comprehensive loss of $6.0 million for the six months ended June
30, 2002 and $9.5 million for the six months ended June 30, 2001 consisted of
its reported net losses attributable to common shareholders and unrealized
losses on marketable securities.


2. Restructuring Charges

In July 2001, the Company's Board of Directors approved the Company's plan
to exit its point-to-multipoint outdoor unit product line. In connection with
this decision, the Company recorded an $11.6 million restructuring charge for
the year ended December 31, 2001. Of the $11.6 million in restructuring costs,
$9.4 million relates to non-cash writedowns to net realizable value of the
Company's inventories, fixed assets and other assets and $2.2 million relates to
cash paid or to be paid for workforce reductions, excess facility costs and
contract costs. Approximately $1.3 million was paid for such costs through June
30, 2002. Remaining accrued restructuring costs at June 30, 2002 consists of
approximately $588,000 for facility consolidations, $108,000 for workforce
reduction charges and $200,000 for contract terminations.

In the three months ended June 30, 2002, the Company recorded an additional
non-cash restructuring charge of $461,000 due to a decrease in estimated net
realizable value of equipment from the discontinued point-to-multipoint outdoor
unit product line.

3. Restricted Cash

At June 30, 2002, the Company has $599,000 of restricted cash classified as
a current asset. These funds are restricted by the terms of two standby letters
of credit which satisfy certain financial obligations of the Company.


7



4. Note Receivable

In February 2002, the Company negotiated the early repayment of a note
receivable and, accordingly, as of December 31, 2001 reduced its valuation
allowance to reflect the amount of the note to be repaid of $1.0 million. The
$1.0 million amount was fully paid in the quarter ended March 31, 2002.


5. Inventories

Inventories are stated at the lower of cost or market and consist of the
following (in thousands):


June 30, December 31,
2002 2001
------------ -------------
(unaudited)
Parts and subassemblies....................... $ 228 $ 126
Work-in process .............................. 85 3
------ ------
$ 313 $ 129
====== ======

6. Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):

June 30, December 31,
2002 2001
------------ -------------
(unaudited)
Machinery and equipment ...................... $ 11,852 $ 10,070
Furniture and fixtures ....................... 812 813
Leasehold improvements ....................... 1,958 1,958
Equipment under capital leases ............... 3,029 4,586
-------- --------
17,651 17,427
Less accumulated depreciation and amortization (13,830) (12,759)
-------- --------
$ 3,821 $ 4,668
======== ========

The net book value of equipment under capital leases was approximately
$949,000 and $1,395,000 at June 30, 2002 and December 31, 2001, respectively.

Depreciation expense for the six months ended June 30, 2002 and 2001 was
$1,072,000 and $2,226,000, respectively.


7. Earnings Per Share

Earnings per share has been computed by dividing the net loss by the
weighted average common shares outstanding. No effect has been given to the
future exercise of common stock options and stock warrants, since the effect
would be antidilutive for all reporting periods.


8





Three months ended Six months ended
June 30, June 30,
(unaudited) (unaudited)
-------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------

Historical: (in thousands, except per share data)

Net loss .............................................. $ (4,037) $ (4,442) $ (5,980) $ (9,545)
======== ======== ======== ========

Weighted average shares of common stock outstanding.... 16,708 16,743 16,688 16,741
======== ======== ======== ========

Basic and diluted net loss per share .................. $ (0.24) $ (0.27) $ (0.36) $ (0.57)
======== ======== ======== ========



8. Accrued Expenses

Accrued expenses consist of the following (in thousands):




June 30, December 31,
-------------- --------------
2002 2001
-------------- --------------
(unaudited)

Accrued payroll, commissions and related expenses..................... $ 583 $ 556
Accrued warranty expense.............................................. 25 25
Other accrued expenses................................................ 132 222
-------------- --------------
$ 740 $ 803
============== ==============




Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Overview

We are currently developing and marketing FiberLeap(TM) products, which
transparently transmit fiber optic signals over a wireless link between two
access points. Using our wireless products, fiber optic carriers and enterprises
can obtain connectivity at fiber optic data rates and quality of service, but
where fiber optic cable itself is not available or is not economically viable.
Our current FiberLeap(TM) 2006 product is a compact, easily deployed product
that enables fiberless transmission of data, voice and video communication at
fiber rates that are variable from an OC-3 rate of 155 Mbps to an OC-12 rate of
622 Mbps.

We commenced operations in 1982 and, prior to 1999, derived the significant
majority of our sales from our millimeter-wave products business segment.
Millimeter waves are electromagnetic waves having wavelengths between one and
ten millimeters and frequencies from 30 GHz to 300 GHz. In August 1999, we
adopted a plan to focus all of our resources on our broadband connectivity
business (then focused on point-to-multipoint outdoor units) and to dispose of
the millimeter-wave products segment. We decided to dispose of this segment
because it would have required us to reallocate financial and management
resources from the broadband point-to-multipoint outdoor unit business. The
segment was sold on February 8, 2000. The following management's discussion and
analysis addresses our broadband connectivity business.

Due to changing market conditions, in July 2001, we made the decision to
exit the point-to-multipoint outdoor unit business and to focus all of our
resources on closing the connectivity gap in fiber networks. Since that time, we
have restructured our company to address this new opportunity, FiberLeap(TM)
trial and Beta units have been developed and tested, a new marketing program has
been initiated, and limited production has begun.

The overall economic climate in the United States has declined since we
decided to focus on our FiberLeap(TM) products. In particular, telecommunication
markets have experienced a severe downturn, which has been highlighted by the
bankruptcy filings of several former prominent telecommunications companies.
Telecommunication markets remain depressed, and we cannot predict how long they
will take to recover or the extent of any recovery. This uncertainty in the
telecommunications industry and in the larger economy has made it very difficult
to successfully launch our FiberLeap(TM) products and to build a business based
on those products. While we continue to talk with potential purchasers of our
FiberLeap(TM) products, we do not have any significant customers for those
products and we cannot predict when (or if) we will obtain significant
customers. Our current financial position may be inadequate to enable us to
continue to pursue our efforts to build our FiberLeap(TM) business until more
favorable market conditions return.

In light of these factors, our board decided that the company should
explore a wide variety of strategic opportunities and alternatives, and we are
currently doing so. As part of this process, we are investigating and having
discussions concerning possible strategic combinations. We have retained the
investment banking firm Ferris, Baker Watts as our financial adviser to assist
with the consideration of the various options. See "Safe Harbor for
Forward-Looking Statements" below.


For the three months and six months ended June 30, 2002, all of our sales
were to customers located in the United States. For the three months and six
months ended June 30, 2001, approximately 99.6% of our sales were to a customer
located in Canada. Sales to customers located outside the United States may
represent a significant portion of our total sales in future periods.

9




Result of Operations

The following table provides statements of operations data as a percentage
of sales for the periods presented. The percentages may not add due to rounding.



Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
------------------------------------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------

Sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 10,850.0 220.8 12,815.4 283.4
-------- ----- -------- -----

Gross margin (loss) ......................... (10,750.0) (120.8) (12,715.4) (183.4)
Operating expenses
Research and development, net ........... 13,487.5 189.3 16,923.1 256.8
Selling, general and administrative...... 20,975.0 178.1 23,992.3 249.4
Restructuring costs ..................... 5,762.5 -- 3,546.2 --
-------- ----- -------- -----

Total operating expenses .............. 40,225.0 367.4 44,461.5 506.2
-------- ----- -------- -----

Operating loss .............................. (50,975.0) (488.1) (57,176.9) (689.7)
Other income (expense) ...................... 512.5 29.2 11,176.9 49.1
-------- ----- -------- -----

Loss before income taxes .................... (50,462.5) (458.9) (46,000.0) (640.6)
Income taxes ................................ (0.0) (0.0) (0.0) (0.0)
-------- ----- -------- -----

Net loss .................................... (50,462.5)% (458.9)% (46,000.0)% (640.6)%
======== ===== ======== =====



Three Months and Six Months Ended June 30, 2002 and 2001

Sales

Sales decreased 99% to $8,000 for the three months ended June 30, 2002 from
$968,000 for the three months ended June 30, 2001. Sales decreased 99% to
$13,000 for the six months ended June 30, 2002 from $1.5 million for the six
months ended June 30, 2001. The decrease in sales from 2001 to 2002 reflects
reduced shipments of our planar point-to-multipoint products resulting from a
general industry decline, our discontinuation of shipments to our former major
customer Alcatel, and our decision to exit our point-to-multipoint outdoor unit
product line. In addition, we have not yet generated revenue from sales of our
FiberLeap (TM) products.

Cost of Sales

Cost of sales consists of component and material costs, direct labor costs,
warranty costs, overhead related to manufacturing our products and customer
support costs. Cost of sales decreased $1.2 million to $868,000 for the three
months ended June 30, 2002 from $2.1 million for the three months ended June 30,
2001. Cost of sales decreased $2.5 million to $1.7 million for the six months
ended June 30, 2002 from $4.2 million for the six months ended June 30, 2001.
Gross margins were negative 10,750% in the three months ended June 30, 2002 and
negative 121% for the three months ended June 30, 2001. Gross margins were
negative 12,715% in the six months ended June 30, 2002 and negative 183% for the
six months ended June 30, 2001. The change in cost of sales and the decline in
gross margin as a percentage of sales were attributable primarily to decreased
shipments of our products and the absorption of our manufacturing costs over
lower production volume.


10


Research and Development Expenses

Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. These include
costs for development of products and components, test equipment and related
facilities. Gross research and development expenses decreased by $1 million to
$1.1 million for the three months ended June 30, 2002 from $2.1 million for the
three months ended June 30, 2001. Gross research and development expenses
decreased by $1.9 million to $2.2 million for the six months ended June 30, 2002
from $4.1 million for the six months ended June 30, 2001. This decrease is
attributable to reductions in the size of our research and development staff,
development material, capital equipment, and related facilities and support
costs. Research and development costs were partially offset by customer funding
of $229,000 for the three months ended June 30, 2001, and $266,000 for the six
months ended June 30, 2001.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of employee
salaries and associated costs for selling, marketing, customer support,
information systems, finance, legal, and administration. Selling, general and
administrative expenses remained consistent at $1.7 million for the three months
ended June 30, 2002 and for the three months ended June 30, 2001. Selling,
general and administrative expenses decreased $600,000 to $3.1 million for the
six months ended June 30, 2002 from $3.7 million for the six months ended June
30, 2001. The decrease was due primarily to a decrease in the number of
personnel in these areas and from decreases in related spending as we reduced
the administrative structure of the company in response to the decrease in sales
and production volumes.

Other Income (Expense)

Other income (expense) consists of interest and dividends earned on cash
and marketable securities and other non-operating income offset by interest
expense on debt and capital lease obligations and miscellaneous non-operating
expenses. Total other income (expense) decreased to $41,000 in income for the
three months ended June 30, 2002 from $283,000 in income for the three months
ended June 30, 2001. Total other income (expense) increased to $1.5 million in
income for the six months ended June 30, 2002 from $731,000 in income for the
six months ended June 30, 2001. Interest expense decreased to $93,000 for the
three months ended June 30, 2002 from $144,000 for the three months ended June
30, 2001. Interest expense decreased to $198,000 for the six months ended June
30, 2002 from $320,000 for the six months ended June 30, 2001. Interest and
other income decreased to $134,000 for the three months ended June 30, 2002 from
$427,000 for the same period in 2001 primarily due to reductions in the balances
of cash and marketable securities and reductions in interest rates. Interest and
other income decreased to $428,000 for the six months ended June 30, 2002 from
$1.1 million for the same period in 2001 primarily due to reductions in the
balances of cash and marketable securities and reductions in interest rates.
Income from settlement of litigation of $1.2 million for the six months ended
June 30, 2002 resulted from the settlement of the litigation against Alcatel.


Liquidity and Capital Resources

Since 1997, we have financed our operations primarily through the sale of
redeemable preferred stock, from proceeds of our initial public offering in
February 2000 and, to a much lesser extent, from cash generated by our
discontinued operations. We have also issued subordinated notes and used
equipment lease financing and bank lines of credit to provide cash.

On February 7, 2000 we completed an initial public offering of 4,600,000
shares of our common stock at $17.00 per share under the terms and conditions
contained in an underwriting agreement dated February 1, 2000 with various
underwriters. We received net proceeds from our initial public offering of $71.1
million, after underwriting discounts and commission and offering costs, to be
used primarily for general corporate purposes.

At June 30, 2002, we had cash and cash equivalents of $10.7 million
(including restricted cash of $599,000 - see Note 3 to Financial Statements) and
marketable securities of $6.1 million.


11



The decrease in accounts receivable to $2,000 at June 30, 2002 from
$438,000 at December 31, 2001 reflects the settlement of accounts receivable and
the related allowance for doubtful accounts from Alcatel as a result of the
settlement of litigation against Alcatel. The increase in accounts payable to
$269,000 at June 30, 2002 from $169,000 at December 31, 2001 reflects an
increase in sales and marketing efforts and inventory procurement related to
initial production of FiberLeap(TM) product.

At June 30, 2002, we had approximately $900,000 in long-term debt, of which
$100,000 is due through June 2003 with an interest rate of 10% and approximately
$800,000 is due through November 2003 with an interest rate of 12%.

At June 30, 2002, we had approximately $1.9 million in capital lease
obligations, which are due through January 2005.

Cash utilized in operating activities in the six months ended June 30, 2002
was $4.4 million compared to $9.2 million for the same period in 2001. For both
of these periods, cash used in operating activities has primarily represented
funding of our net losses.

Cash provided by investing activities for the six months ended June 30,
2002 was $425,000 compared to cash provided by investing activities of $8.9
million for the same period in 2001. In the six months ended June 30, 2002 these
amounts related primarily to the purchase and sale of marketable securities and
repayment of a note receivable. In the six months ended June 30, 2001 these
amounts related primarily to the purchase and sale of markable securities.

Cash utilized by financing activities in the six months ended June 30, 2002
was $1.8 million compared to cash utilized by financing activities of $1.7
million for the same period in 2001. The financing activities for both periods
consisted primarily of payments on capital lease obligations and long term debt
and transfers to restricted cash. In addition, the June 30, 2001 amounts were
partially offset by the proceeds from equipment lease financing.

Our 2002 and future cash requirements will depend upon a number of factors,
including the timing and extent of growth in our FiberLeap(TM) product line and
the timing and level of research and development activities and sales and
marketing campaigns, and our ability to generate sales orders while controlling
manufacturing and overhead costs. We believe that our cash and marketable
securities balances at June 30, 2002 will provide sufficient capital to fund our
operations, as currently conducted, for the next 12 months. However, we are
currently exploring a wide variety of strategic opportunities and alternatives,
including having discussions concerning possible strategic combinations. Our
capital needs may be higher or lower depending on the outcome of our exploration
of these strategic opportunities and alternatives. If additional capital is
required or desired, there can be no assurance that additional financing will be
available to us on favorable terms or at all.


Disclosures About Market Risk

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed above
under "Part I - Financial Information" and below under "Safe Harbor for
Forward-Looking Statements."

As of June 30, 2002, we had cash and cash equivalents of $10.7 million.
Substantially all of these amounts consisted of highly liquid investments with
remaining maturities at the date of purchase of less than 90 days. As of June
30, 2002, we had marketable securities of $6.1 million, which consisted of
short-term, interest bearing, investment grade securities or direct or
guaranteed obligations of the U.S. government, with maturities through July
2003. These investments are exposed to interest rate risk and will decrease in
value if market interest rates increase. We believe a hypothetical increase in
market interest rates by 10 percent from the June 30, 2002 rates would not cause
the fair value of these investments to decline significantly, since the
Company's investments mature within thirteen months. Although an immediate
increase in interest rates would not have a material effect on our financial
condition or results of operations, declines in interest rates over time will
reduce our interest income.


12



We do not own any material equity investments. Therefore, we do not
currently have any direct equity price risk. In the past three years, all sales
to international customers were denominated in United States dollars and,
accordingly, we were not exposed to foreign currency exchange rate risks.


Safe Harbor for Forward-Looking Statements

General Overview

This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws which are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions, and other statements
which are other than statements of historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "intends", "plans", "anticipates", "contemplates",
"believes", "estimates", "predicts", "projects", "potential", "continue", and
other similar terminology or the negative of these terms. From time to time, we
may publish or otherwise make available forward-looking statements of this
nature. All such forward-looking statements, whether written or oral, and
whether made by us or on our behalf, are expressly qualified by the cautionary
statements described in this Form 10-Q, including those set forth below, and any
other cautionary statements which may accompany the forward-looking statements.
In addition, we undertake no obligation to update or revise any forward-looking
statement to reflect events, circumstances, or new information after the date of
this Form 10-Q or to reflect the occurrence of unanticipated events, and we
disclaim any such obligation.

We believe that the forward-looking statements included in this Form 10-Q
have a reasonable basis. However, forward-looking statements are only
predictions that relate to future events or our future performance and are
subject to known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated, or implied by these forward-looking
statements. As a result, we cannot guarantee future results, outcomes, levels of
activity, performance, developments, or achievements, and there can be no
assurance that our expectations, intentions, anticipations, beliefs, or
projections will result or be achieved or accomplished.

Cautionary Statements of General Applicability

In addition to other factors and matters discussed elsewhere in this Form
10-Q, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, difficulties or delays in obtaining
customers; dependence on a limited number of customers; lack of or delay in
market acceptance and demand for our current and contemplated products; our
having limited capital; the expense of defending and the outcome of pending
andfuture stockholder litigation; developments in our relatively new industry
and in the larger economy; the downturn and ongoing uncertainty in the
telecommunications industry and larger economy; our recent focus on our current
business; difficulties or delays inherent in entering new markets and business
areas; difficulties or delays in developing and establishing new products,
product lines, and business lines; difficulties or delays in developing,
manufacturing, and supplying products with the contemplated or desired features,
performance, price, cost, and other characteristics; difficulties in estimating
costs of developing and supplying products; difficulties in developing,
manufacturing, and supplying products in a timely and cost-effective manner;
difficulties or delays in developing improved products when expected or desired
and with the additional features contemplated or desired; our limited ability to
predict our future financial performance; our inability to predict the date of
our profitability; the expected fluctuation in our quarterly results; the
expected volatility in our stock price; difficulties in attracting and retaining
qualified personnel, particularly in light of our business uncertainty, previous
workforce restructurings, and lower stock price; our dependence on key
personnel; inability to protect our proprietary technology; the potential for
intellectual property infringement, warranty, product liability, and other
claims; failure of our customers to sell broadband connectivity



13


solutions that include our products; difficulties in our customers or ultimate
end users of our products obtaining sufficient funding; the impact,
availability, pricing, and success of competing technologies and products;
general competition in the broadband connectivity industry and in other
industries we enter; difficulties in distinguishing our products from competing
technologies and products; difficulties in complying with existing governmental
regulations and developments or changes in governmental regulation; difficulties
or delays in obtaining any necessary governmental or regulatory permits,
waivers, or approvals, including any necessary for us to offer and sell a
type-approved product with the contemplated performance and other
characteristics; our dependence on third-party suppliers and manufacturers;
difficulties in obtaining satisfactory performance from third-party
manufacturers and suppliers; risks associated with foreign sales such as
currency and political risk; investment risk resulting in the decrease in value
of our investments; difficulties in collecting our accounts receivable; future
stock sales by our current stockholders, including our directors and management;
the effect of our anti-takeover defenses (including our stockholder rights
plan); and risks associated with any acquisitions or investments in which we may
be involved. Many of these and other risks and uncertainties are described in
more detail in our annual report on Form 10-K for the year ended December 31,
2001 filed with the Securities and Exchange Commission.

Specific Cautionary Statements Concerning Focus on FiberLeap(TM) Product
Line

In July 2001, we announced that we were going to focus on our FiberLeap(TM)
product line and exit our old point-to-multipoint outdoor unit product line. As
a result, it is difficult to predict our future prospects in this market based
on our limited history. Many of the cautionary statements contained in this Form
10-Q are particularly relevant in light of this recent decision. Our future
depends on our ability to develop, market, gain market acceptance of, and sell
our FiberLeap(TM) products. We have limited experience with this new product
line and in the markets the FiberLeap(TM) products address. We currently have no
significant customers for our FiberLeap(TM) products. We are still in the
process of developing our FiberLeap(TM) product line and obtaining the
governmental approvals necessary for the commercial sale and deployment of our
FiberLeap(TM) products. There can be no assurance that we will be successful in
developing the FiberLeap(TM) product line, obtaining customers for our
FiberLeap(TM) products, obtaining all necessary governmental approvals at all or
in a timely manner, developing or establishing an acceptable business based
solely on sales of FiberLeap(TM) products, or addressing the other issues
inherent in entering a new line of business. These issues, together with many of
the other cautionary statements contained in this Form 10-Q, could have an
adverse effect on our business, financial condition, results of operations, and
viability as an ongoing company.

Specific Cautionary Statements relating to Strategic Opportunities and
Alternatives

We are currently exploring a wide variety of strategic opportunities and
alternatives. There can be no assurance whatsoever that any transaction or other
corporate action will result from this exploration of alternatives. Further,
there can be no assurance whatsoever concerning the type, form, structure,
nature, results, timing, or terms and conditions of any such potential action,
even if such an action does result from this exploration. We do not intend to
make any additional comments regarding this matter unless and until a definitive
transaction agreement has been reached, the exploration of alternatives has been
terminated, or there are other definitive developments warranting further
disclosure.

Other factors (in addition to those described in this Form 1O-Q) that could
influence any possible transaction or other corporate action resulting from this
exploration of alternatives include, without limitation, the following: our
ability to identify desirable strategic alternatives, as well as our ability to
execute such alternatives or the transactions associated with such alternatives;
the level of interest of third parties in pursuing possible strategic
transactions with us; our desire and ability (or lack thereof) to continue to
explore possible strategic alternatives and opportunities; the desire and
ability (or lack thereof) of us and any relevant third parties to reach mutually
acceptable definitive documentation to effect a possible strategic transaction
and, if that occurs, whether the conditions to closing would then be satisfied;
the time and costs required to explore and investigate possible transactions and
other corporate actions; management and board interest in and distraction due to
exploring and investigating possible transactions and other corporate actions;
and reactions, either positive or negative, of investors, competitors,
customers, employees, and others to our exploring possible strategic
alternatives and opportunities and to any specific strategic alternative or
opportunity selected by us.

Specific Cautionary Statements relating to Possible Delisting from Nasdaq
National Market

Our common stock is currently traded on the Nasdaq National Market. One of
the requirements for continued listing on that market is that the minimum bid
price of our stock must remain above $1.00. We received a letter of notice dated
July 11, 2002 from the Nasdaq National Market stating that, due to our minimum
bid price levels remaining under the $1.00 level for 30 consecutive trading
days, we were on notice that we could be subject to a delisting procedure should
the bid price continue to remain under the $1.00 level for an additional 90-day
period (ending October 9, 2002), unless our stock attained a bid price of $1.00
or more for a period of 10 consecutive days during that 90-day period. There can
be no assurance that our stock price will attain a bid price of $1.00 or more
for a period of 10 consecutive days prior to October 9, 2002. If the delisting
procedure is commenced (or perhaps even before), we may take certain actions to
attempt to increase the bid price of our stock. While there are many actions
that may be taken to attempt to increase the bid price of our stock, two of the
possibilities are a reverse stock split and a stock repurchase. Any such actions
(even if successful) may have adverse effects on us, such as adverse reaction
from employees, investors and financial markets in general, adverse publicity,
and adverse reactions from customers. There are other requirements for continued
listing on the Nasdaq National Market, such as having a minimum of $4.0 million
of net tangible assets, $5.0 million minimum value of public float, 400 round
lot stockholders, and two market makers. There can be no assurance that we will
continue to meet these listing requirements. Should our stock be delisted from
the Nasdaq National Market, we may have our stock listed on the Nasdaq SmallCap
Market (if we meet the requirements for listing on that market) or traded on the
OTC Bulletin Board. These alternatives may result in a less liquid market
available for existing and potential stockholders to buy and sell shares of our
stock and could further depress the price of our stock.



Possible Implications of Cautionary Statements

The items described above, either individually or in some combination,
could have a material adverse impact on our reputation, business, need for
additional capital, ability to obtain additional debt or equity financing,
current and contemplated products gaining market acceptance, development of new
products and new areas of business, cash flow, results of operations, financial
condition, stock price, viability as an ongoing company, results, outcomes,
levels of activity, performance, developments, or achievements. Given these
uncertainties, investors are cautioned not to place undue reliance on
forward-looking statements.


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

See Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations, - Disclosures about Market Risk.


PART II - OTHER INFORMATION


Item 1. Legal Proceedings.

During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against us in the U.S. District
Court for the Southern District of New York, Katz v. Telaxis Communications


14


Corporation et al., Kucera v. Telaxis Communications Corporation et al.,
Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis
Communications Corporation et al. The lawsuits also name one or more of the
underwriters in our initial public offering and certain of our officers and
directors. On April 19, 2002, the plaintiffs filed a single consolidated amended
complaint which supersedes the individual complaints originally filed. The
amended complaint alleges, among other things, violations of the registration
and antifraud provisions of the federal securities laws due to alleged
statements in and omissions from our initial public offering registration
statement concerning the underwriters' alleged activities in connection with the
underwriting of our shares to the public. The amended complaint seeks, among
other things, unspecified damages and costs associated with the litigation.
These lawsuits against us have been assigned along with, we understand,
approximately 1,000 other lawsuits making substantially similar allegations
against approximately 300 other publicly-traded companies and their public
offering underwriters to a single federal judge in the U.S. District Court for
the Southern District of New York for consolidated pre-trial purposes. On July
15, 2002, we, together with the other issuers named as defendants in these
coordinated proceedings, filed a collective motion to dismiss the consolidated
amended complaints on various legal grounds common to all or most of the issuer
defendants. This motion is currently pending. We and our officers and directors
deny any liability and intend to vigorously defend the allegations against us.

We are subject to potential liability under contractual and other matters
and various claims and legal actions which may be asserted. These matters may
arise in the ordinary course and conduct of our business. While the outcome of
the potential claims and legal actions against us cannot be forecast with
certainty, we believe that such matters should not result in any liability which
would have a material adverse effect on our business.

Item 2. Changes in Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

We did not issue or sell any unregistered securities in the three months
ended June 30, 2002.

Use of Proceeds from Registered Offerings

On February 1, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-87885) filed in
connection with the initial public offering of 4,600,000 shares of our common
stock.

We received approximately $71.1 million of net proceeds from the offering.
Those net proceeds are being used for working capital and general corporate
purposes. Pending such uses, the net proceeds have been invested in short-term,
interest bearing, investment grade securities or direct or guaranteed
obligations of the U.S. government. From the time of receipt through June 30,
2002, we have applied approximately $54.2 million of the net proceeds from the
offering toward working capital, financing capital expenditures, and funding
operating losses.

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

We held our annual meeting of stockholders on May 21, 2002. In connection
with that meeting, beginning on April 19, 2002, we distributed a definitive
proxy statement to our stockholders of record as of March 22, 2002. At that
meeting, the following nominees were each elected to serve a three-year term as
one of our directors:

BOARD'S NOMINEE FOR WITHHELD
--------------- --- --------
Albert E. Paladino 13,613,447 121,667
David A. Norbury 13,617,416 117,698
John L. Youngblood 12,993,903 741,211

The terms of office of each of Raphael H. Amit, Carol B. Armitage, Allan M.
Doyle, Jr., and Ralph A. Goldwasser as one of our directors continued after
the May 21, 2002 annual meeting of stockholders.


Item 5. Other Information

Certification Under Sarbanes-Oxley Act

Our chief executive officer and chief financial officer have furnished to
the Securities and Exchange Commission the certification with respect to this
report that is required by Section 906 of the Sarbanes-Oxley Act of 2002.


Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

None.

15


(b) Reports on Form 8-K

We filed no reports on Form 8-K during the quarter ended June 30, 2002.




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


Telaxis Communications Corporation



Date: August 14, 2002 By: /s/ Dennis C. Stempel
-----------------------------------------------
Dennis C. Stempel,
Senior Vice President, Chief Financial Officer
and Treasurer (principal financial and
accounting officer)






16