TERAYON COMMUNICATION SYSTEMS, S-3/A, 2000-06-30

TERAYON COMMUNICATION SYSTEMS
S-3/A, 2000-06-30
TELEPHONE & TELEGRAPH APPARATUS

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As filed with the Securities and Exchange Commission on June 29, 2000

Registration No. 333-37978

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

Amendment No. 1
to the
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________

TERAYON COMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
Delaware 3661 77-0328533
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
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2952 Bunker Hill Lane
Santa Clara, California 95054
(408) 727-4400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Edward Lopez
General Counsel
2952 Bunker Hill Lane
Santa Clara, California 95054
(408) 727-4400

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
___________

Copies to:

Karyn S. Tucker
Angelique C. Tremble
Rachel N. Halpren
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
(415) 693-2000

___________

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.

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

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8 (a), may determine. (1)

(1) The registration fee was previously paid.

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Explanatory Note

This Registration Statement contains a Prospectus relating to a public
offering of an aggregate of 1,547,770 shares of common stock, $0.001 par value
per share ("Common Stock"), of Terayon Communication Systems, Inc., a Delaware
corporation, that are owned by former shareholders of ComBox Ltd., a company
organized under the laws of the State of Israel (the "ComBox Offering"),
together with separate Prospectus pages relating to concurrent offerings of (i)
an aggregate of 377,380 shares of Common Stock that are owned by Internet
Telecom, a company organized under the laws of the State of Israel, and certain
individuals formerly employed and currently employed by the Company's wholly
owned subsidiary Telegate Ltd. (the "Internet Telecom Offering"); (ii) an
aggregate of 1,404,552 shares of Common Stock that are owned by Tyco Electronics
Corporation, a company organized under the laws of the state of Pennsylvania and
an indirect, wholly owned subsidiary of Tyco International Ltd. (the "Tyco
Offering"); and (iii) an aggregate of 536,766 shares of Common Stock that are
owned by former shareholders of Ultracom Communications Holdings (1995) Ltd., a
company organized under the laws of the State of Israel (the "Ultracom
Offering"). The complete Prospectus for the ComBox Offering follows immediately.
After such Prospectus are the following alternate pages for the Internet
Telecom Offering, the Tyco Offering and the Ultracom Offering: a front cover
page; a "Selling Stockholders" section; and a back cover page. All other pages
of the Prospectus for the ComBox Offering are to be used for the ComBox
Offering, the Internet Telecom Offering, the Tyco Offering and the Ultracom
Offering.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.

Subject to Completion

(June 29, 2000)

TERAYON COMMUNICATION SYSTEMS, INC.

1,547,770 Shares

Common Stock

The Selling Stockholders: The selling stockholders identified in this
prospectus are selling 1,547,770 shares of our common
stock. We are not selling any shares of our common
stock under this prospectus and will not receive any
of the proceeds from the sale of shares by the
selling stockholders.

Offering Price: The selling stockholders may sell the shares of
common stock described in this prospectus in a number
of different ways and at varying prices. We provide
more information about how they may sell their shares
in the section titled "Plan of Distribution" on page
25.

Trading Market: Our common stock is listed on the Nasdaq National
Market under the symbol "TERN." On June 27, 2000, the
closing sale price of our common stock, as reported
on the Nasdaq National Market, was $70.125.

Risks: Investing in our common stock involves a high degree
of risk. See "Risk Factors" beginning on page 4.

The shares offered or sold under this prospectus have not been approved by
the Securities and Exchange Commission or any state securities commission, nor
have these organizations determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is ______________, 2000

Terayon, TeraComm, TeraLink, TeraPro, TeraView, CherryPicker and the Terayon
logo are our trademarks. This prospectus also includes trade dress, trade names
and trademarks of other companies. Our use or display of other parties'
trademarks, trade dress or products is not intended to and does not imply a
relationship with the trademark or trade dress owners.
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PROSPECTUS SUMMARY

The following is a summary of our business. You should carefully read the
section entitled "Risk Factors" in this prospectus, our Annual Report on Form
10-K for the year ended December 31, 1999 and our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 for more information on our business and
the risks involved in investing in our stock.

In addition to the historical information contained in this prospectus, this
prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors"
beginning on page 8 of this prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in our
Annual Report and Quarterly Report contain a discussion of some of the factors
that could contribute to those differences.

Terayon

Overview

We develop, market and sell broadband access systems that enable cable
operators and other providers of broadband access services to cost-effectively
deploy reliable two-way broadband services over cable, copper wire and wireless
systems. To date, our development and marketing efforts have focused primarily
on cable operators. However, with some recent acquisitions of complimentary
technology and businesses, we have also turned our attention to providers of
broadband services using existing telephone, copper wire infrastructures and
wireless systems.

In recent years, the volume of bandwidth intensive data, voice and video
traffic across the Internet, corporate intranets and other public networks has
increased dramatically. International Data Corporation ("IDC") estimates that
the number of Internet users will increase from approximately 69 million at the
end of 1997 to approximately 320 million by the end of 2002. IDC also estimates
that the number of home office households will increase from approximately 35
million at the end of 1997 to approximately 50 million by the end of 2002.
Although various technologies have emerged to address the need for broadband
access, the existing cable infrastructure currently provides the highest
available two-way transmission speeds and "always-on" availability. In
addition, the existing cable infrastructure currently passes more than 95% of
homes in the U.S. and a large number of small businesses.

Our first product was the TeraComm system, which is based on our patented
Synchronous Code Division Multiple Access or "S-CDMA" technology. The TeraComm
system is comprised of the TeraPro cable modem, the TeraLink 1000 Master
Controller, the TeraLink Gateway and the TeraView Element Management and
Provisioning software. Our patented S-CDMA technology enables reliable two-way
broadband communications over both pure coaxial and hybrid fiber/coax cable
infrastructures and is designed to enable cable operators to maximize the
capacity and reliability of broadband services over any cable plant. Our
technology maximizes the resistance to noise that interferes with data
transmissions over previously unusable frequency spectrums and thereby allows
cable operators to minimize time-consuming and costly cable plant upgrades,
achieve reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm system
can provide additional revenue-generating services to end users. This enables
cable operators to compete effectively in the emerging market for broadband
access services.

We sell our products to cable operators through direct sales forces in North
America, Latin America and Europe. We also distribute our products via
distributors and systems integrators. Companies currently using or distributing
the TeraComm system include Shaw Communications Inc., Rogers Communications
Inc., TCA Cable TV, Inc., Cablevision Systems, Inc., and Crossbeam Networks
Corporation, a wholly owned subsidiary of Sumitomo Corporation.

The rapid evolution of broadband has resulted in cable television operators,
providers of telephone services and other service providers seeking to provide a
bundle of voice, data and video services to their residential and commercial
subscribers over existing and new infrastructures. Consistent with our
objective to be a leading provider of broadband access, through a series of
recent acquisitions, we are building a complete portfolio of broadband

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products to support high speed delivery of voice, data and video services over
cable, copper wire (DSL) and wireless.

In September 1999, we acquired Imedia Corporation and its CherryPicker
digital video management system. In November 1999, we acquired Radwiz Ltd., a
provider of communication access systems based on high-speed Internet Protocol
("IP") routing, integrated with telephony, and in January 2000, we acquired
Telegate Ltd., a developer and manufacturer of telephony and data access
platforms that are deployed by service providers to deliver efficient carrier-
class voice services over cable. In April 2000, we acquired the following
companies: ComBox Ltd., an Israeli company that manufactures broadband data
systems and satellite communications based on international standards; Internet
Telecom Ltd., an Israeli company that is a supplier of PacketCable and other
standards-based, voice-over-IP systems and technologies; Access Network
Electronics, a division of Tyco Electronics Corporation, a producer of DSL
(Digital Subscriber Line) systems that provide multiple phone lines on a single
pair of cooper wires; and Ultracom Communications Holdings (1995) Ltd., an
Israeli company that is a supplier of broadband systems-on-silicon.

Our company was incorporated in California in January 1993 and reincorporated
in Delaware in July 1998. References in this report to "Terayon," "we," "our"
and "us" refer to Terayon Communication Systems, Inc. and its subsidiaries.

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Recent Developments

Stock Split

The Board of Directors approved a two-for-one stock split in February
2000, subject to stockholder approval of an increase to the authorized number of
shares of the Company's common stock from 45,000,000 to 200,000,000. The
increase to the authorized number of shares of common stock was subsequently
approved by the stockholders in April 2000. The stock split was paid in the form
of a stock dividend, declared by the Board of Directors in April 2000, to all
stockholders of record on April 25, 2000, and was distributed on May 5, 2000.
All share numbers reflect the two-for-one stock split.

Acquisitions

ComBox Ltd.

On April 18, 2000, we acquired all of the outstanding shares of ComBox Ltd.
in exchange for 1,547,770 shares of our common stock. We accounted for the
acquisition as a purchase.

Internet Telecom Ltd.

On April 18, 2000, we acquired, through our subsidiary Telegate Ltd., certain
assets of Internet Telecom Ltd. in exchange for 377,380 shares of our common
stock. We accounted for the acquisition as a purchase.

Tyco Electronics Corporation

On April 22, 2000, we acquired certain assets and liabilities of the Access
Network Electronics, a division of Tyco Electronics Corporation, in exchange for
1,404,552 shares of our common stock. We accounted for the acquisition as a
purchase.

Ultracom Communications Holdings (1995) Ltd.

On April 19, 2000, we acquired outstanding shares of Ultracom Communications
Holdings (1995) Ltd. in exchange for 536,766 shares of our common stock. We
accounted for the acquisition as a purchase.

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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.

We Have a Limited Operating History and a History of Losses.

We have a limited operating history, and it is difficult to predict our
future operating results. We began shipping products commercially in June 1997,
and we have only been shipping products in volume since the first quarter of
1998. As of March 31, 2000, we had an accumulated deficit of $176.8 million.
We believe that we will continue to experience net losses for the foreseeable
future. Most of our expenses are fixed in advance, and we generally are unable
to reduce our expenses significantly in the short term to compensate for any
unexpected delay or decrease in anticipated revenues. We expect to continue to
increase expenses for the foreseeable future to support increased sales and
marketing and technical support costs. Any significant delay in our anticipated
revenues or commercialization of new products would harm our business. The
revenue and profit potential of our business and our industry are unproven. We
had negative gross margins from our inception until the fourth quarter of 1998,
and any future revenue growth may not result in positive gross margins or
operating profits in future periods.

Our Operating Results May Fluctuate.

Our quarterly revenues are likely to fluctuate significantly in the future
due to a number of factors, many of which are outside our control. Factors that
could affect our revenues include the following:

. variations in the timing of orders and shipments of our products;

. variations in the size of the orders by our customers;

. new product introductions by competitors;

. delays in introducing new products;

. delays of orders forecasted by our customers;

. delays by our customers in the completion of upgrades of cable
infrastructure;

. variations in capital spending budgets of broadband access service providers;

. adoption of industry standards and the inclusion in or compatibility of our
technology with any such standards; and

. delays in obtaining regulatory approval for commercial deployment of cable
modem systems.

Our expenses generally will vary from quarter to quarter depending on the
level of actual and anticipated business activities. Research and development
expenses will vary as we begin development of new products and as our
development programs move to wafer fabrication, which results in higher
engineering expenses.

We have a limited backlog of orders, and net sales for any future quarter are
difficult to predict. Supply, manufacturing or testing constraints could result
in delays in the delivery of our products. Any delay in the product deployment
schedule of one or more of the providers of broadband access services that we
target would have an adverse effect on our operating results for a particular
period. In addition, due to the large dollar size of a typical transaction in
comparison to our total revenues, any delay in the closing of a transaction
could have a significant impact on our operating results for a particular
period.

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A variety of factors affect our gross margin, including the following:

. the sales mix of our products;

. the volume of products manufactured;

. the type of distribution channel through which we sell our products;

. the average selling prices or "ASPs" of our products; and

. the effectiveness of our cost reduction measures.

We anticipate that unit ASPs of our products will decline in the future.
This could cause a decrease in the gross margins for these products. In
addition, the maturity of TeraComm system deployments affects our gross margin.
New deployments of the TeraComm system involve the sale of headend equipment
(which has higher margins) and generally involve smaller quantities of product.
New deployments typically are sold at higher margins than the larger volume
sales of product associated with more mature deployments of the TeraComm system.
The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways and TeraPro
cable modems also affects our gross margin. The TeraPro cable modems have
significantly lower margins than the TeraLink 1000 Master Controller and
TeraLink Gateway headend products. We expect to achieve only nominal margins on
the TeraPro cable modems for the foreseeable future. Further, we expect that
sales of TeraPro cable modems will continue to constitute a significant portion
of our revenues for the foreseeable future.

We also anticipate that our operating results will be impacted by sales,
gross profit and operating expenses of acquired companies. The impact of these
factors on our operating results will vary as we acquire additional companies.

We Are Dependent on a Small Number of Customers.

Four customers accounted for approximately 64% of our revenues for the
quarter ended March 31, 2000 and three customers accounted for approximately 63%
of our revenues for the quarter ended March 31, 1999. We believe that a
substantial majority of our revenues will continue to be derived from sales to a
relatively small number of customers for the foreseeable future. In addition, we
believe that sales to these customers will be focused on a small number of
projects.

The cable industry is undergoing significant consolidation in North America
and internationally, and a limited number of cable operators controls an
increasing number of cable systems. As a result, our sales will be largely
dependent upon product acceptance by the leading cable operators. Currently, ten
cable operators in the United States own and operate facilities passing
approximately 86% of total homes passed. Currently, the timing and size of each
customer's order is critical to our operating results. Our major customers are
likely to have significant negotiating leverage and may attempt to change the
terms, including pricing, upon which we do business with them. These customers
also may require longer payment terms than we anticipate, which could require us
to raise additional capital to meet our working capital requirements. Our
success will depend on our cable modems being widely deployed and our ability to
sell to new customers.

Acquisitions Could Result In Dilution, Operating Difficulties and Other Harmful
Consequences.

We have acquired seven companies since September 1999: Imedia Corporation in
September 1999; Radwiz Ltd. in November 1999; Telegate Ltd. in January 2000; the
Access Network Electronics division (ANE) of Tyco Electronics Corporation in
April 2000; ComBox Ltd. in April 2000; some assets of Internet Telecom Ltd. in
April 2000; and Ultracom Communications Holdings (1995) Ltd. in April 2000. If
appropriate opportunities present themselves, we intend to acquire additional
businesses, technologies, services or products that we believe are strategic.
The process of integrating any acquired business into our business and
operations is risky and may create unforeseen operating difficulties and
expenditures. The areas in which we may face difficulties include:

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. diversion of management time (both ours and that of the acquired companies)
during the period of negotiation through closing and after closing from the
ongoing development of our businesses, issues of integration and future
products;

. decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects or the direction of
the business;

. the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management, and the lack of control if this integration is delayed or not
implemented; and

. the need to implement controls, procedures and policies appropriate for a
larger public group of companies that prior to acquisition had been smaller,
private companies.

We have very limited experience in managing this integration process.
Moreover, the anticipated benefits of any or all of these completed or pending
acquisitions may not be realized. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt,
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could harm our business. Future acquisitions
also could require us to obtain additional equity or debt financing, which may
not be available on favorable terms or at all. Even if available, this
financing may be dilutive.

The Sales Cycle for Our Products Is Lengthy.

The sales cycle associated with our products typically is lengthy, often
lasting six months to a year. Our customers typically conduct significant
technical evaluations of competing technologies prior to the commitment of
capital and other resources. In addition, purchasing decisions may be delayed
because of our customers' internal budget approval procedures. Sales also
generally are subject to customer trials, which typically last three months.
Because of the lengthy sales cycle and the large size of customers' orders, if
orders forecasted for a specific customer for a particular quarter do not occur
in that quarter, our operating results for that quarter could suffer.

There Are Many Risks Associated with Our Participation in the Establishment of
Advanced Physical Layer Specifications to Be Added to DOCSIS.

In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
version of the DOCSIS cable modem specification based in part on our S-CDMA
technology. In September 1999, CableLabs indicated that it intended to proceed
with the advanced physical layer ("PHY") work on two parallel tracks: one for
the development of a prototype based on our S-CDMA technology and one for the
inclusion of Advanced TDMA technology, as proposed by other companies. In
February 2000, CableLabs further clarified the status of the advanced PHY
project regarding a separate release that will include TDMA technologies. In
addition, CableLabs reiterated that it is continuing to work with us on the
development of a DOCSIS specification that could include our S-CDMA technology.
To that end, CableLabs has requested that we submit a prototype of a DOCSIS
system that incorporates an S-CDMA advanced PHY capability for testing.
CableLabs has stated that if the testing of this prototype reveals that the S-
CDMA advanced PHY works as claimed (including proper backwards compatibility and
coexistence with the other aspects of DOCSIS), and if the costs for adding S-
CDMA to DOCSIS products are in line with estimates, then it is likely, but not
certain, that S-CDMA advanced PHY capabilities will be included in a future
version of the DOCSIS specification. The prototype we submit to CableLabs may
fail to demonstrate the level of performance that CableLabs seeks; even if it
does meet performance expectations there can be no guarantee that CableLabs will
incorporate the technology into a future version of DOCSIS specifications. In
addition, if CableLabs does proceed to include S-CDMA in a future DOCSIS
specification, there can be no guarantee that the DOCSIS S-CDMA specification
will be the same as the specification we incorporated in the prototype submitted
for tests, which may require us to further develop our prototype.

Our future revenues and operating results are likely to suffer if S-CDMA is
not included in a future release of DOCSIS. We also may incur substantial
additional research and development expenditures to adapt our specifications to
the version adopted by CableLabs.

CableLabs has not established a schedule for adding the S-CDMA capabilities
to the DOCSIS specifications. Delays in the establishment of a final
specification for S-CDMA in DOCSIS could harm our plans to sell DOCSIS

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compatible modems and headend equipment. In particular, if the final DOCSIS S-
CDMA specification is not approved prior to the time when we are ready to ship
DOCSIS products with S-CDMA features included, then we may be required to delay
the introduction of those products until the DOCSIS S-CDMA specification is
released or to introduce the S-CDMA features as proprietary enhancements to a
standard DOCSIS product. Either one of these events could harm revenues and
operating results.

We have already given CableLabs assurances that we will contribute some
aspects of our proprietary S-CDMA technology to a royalty-free intellectual
property pool, if S-CDMA is included in a future version of DOCSIS
specifications. This royalty-free pool has been established by CableLabs to
facilitate the participation of as many vendors as possible in providing
equipment that is compatible with the DOCSIS specifications. As a result, any
of our competitors who join the DOCSIS intellectual property pool would have
access to some aspects of our technology and would not be required to pay us any
royalties or other compensation. If a competitor is able to duplicate the
functionality and capabilities of our technology, we could lose some or all of
the time-to-market advantage we might otherwise have, which could harm our
future revenues and operating results.

We believe the addition of advanced upstream PHY capabilities to DOCSIS will
increase the overall market for DOCSIS-compatible products, and as such will
result in increased competition in the cable modem market. This competition
could come from existing competitors or from new competitors who enter the
market as a result of the enhancements to the specifications. This increased
competition is likely to result in lower ASPs of cable modem systems and could
harm revenues and gross margins. Because our competitors will be able to
incorporate some aspects of our technology into their products, our current
customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
cable modems with advanced PHY capabilities from multiple suppliers. We may be
unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
more quickly or at lower cost than our competitors. The inclusion of our S-CDMA
technology in future DOCSIS specification could result in increased competition
for the services of our existing employees who have experience with S-CDMA. The
loss of these employees to one or more competitors could harm our business.

DOCSIS standards have not yet been accepted in Europe and Asia. An alternate
standard for cable modem systems, called the EuroModem standard, or DAVIC/DVB,
has been formalized, and some European cable system operators have embraced it.
We intend to develop and sell products that comply with the EuroModem standard
and to pursue having portions of our S-CDMA technology included in a future
version of the EuroModem standard. We may be unsuccessful in these efforts.

We Need to Develop New Products.

Our future success will depend in part on our ability to develop, introduce
and market new products in a timely manner. We also must respond to competitive
pressures, evolving industry standards and technological advances. Our current
S-CDMA products are not DOCSIS-compliant. We are currently developing a
prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY capability
for testing and eventual inclusion in the DOCSIS standard. There is no
guarantee that we will be successful in developing the prototype or that the
prototype, if successfully developed, will be included in a future release of
the DOCSIS standard. We anticipate that during 2000, existing or potential
customers may delay purchases of our current cable modem system in order to
purchase systems that comply with the DOCSIS standard. In addition, potential
new customers could decide to purchase DOCSIS compliant products from one or
more of our competitors rather than from us. As a result, our product sales in
the second half of 2000 may be lower than we anticipate. In order to promote
sales of our currents products we may be required to reduce our prices for sales
to existing customers. This would harm our operating results and gross margin.

As a result of the inclusion of TDMA technology in the new DOCSIS version
announced by CableLabs in February 2000, we will have to incorporate advanced
TDMA technology into our DOCSIS-compliant products. If we are unable to do this
effectively, or in a timely manner, we will lose some or all of the time-to-
market advantage we might otherwise have had.

Our future success will also depend on our ability to develop and market DSL
products for broadband applications. The market for DSL broadband applications
is also subject to evolving standards, such as NEBS compliance in the North
American market, and technological advances. There is no guarantee that we will
be successful in developing products that are compliant with these standards or
that we will be successful in keeping pace with future technological advances in
this arena.

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Average Selling Prices of Cable Equipment Typically Decrease.

The cable equipment systems industry has been characterized by erosion of
average selling prices. We expect this to continue. This erosion is due to a
number of factors, including competition, rapid technological change and price
performance enhancements. The average selling prices for our products may be
lower than expected as a result of competitive pricing pressures, our
promotional programs and customers who negotiate price reductions in exchange
for longer term purchase commitments. We anticipate that ASPs and gross margins
for our products will decrease over product life cycles. In addition, we believe
that the widespread adoption of industry standards is likely to further erode
ASPs, particularly for cable modems. It is likely that the widespread adoption
of industry standards will result in increased retail distribution of cable
modems, which could put further price pressure on our modems. Decreasing ASPs
could result in decreased revenue even if the number of units sold increases.
As a result, we may experience substantial period-to-period fluctuations in
future operating results due to ASP erosion. Therefore, we must continue to
develop and introduce on a timely basis next-generation products with enhanced
functionalities that can be sold at higher gross margins. Our failure to do
this could cause our revenues and gross margin to decline.

We Must Achieve Cost Reductions.

Certain of our competitors currently offer cable modems at prices lower than
ours. Market acceptance of our products will depend in part on reductions in
the unit cost of our products. We expect that as headend equipment becomes more
widely deployed, the price of cable modems and other products will decline. In
particular, we believe that the widespread adoption of industry standards such
as DOCSIS will cause increased price competition for cable modems. However, we
may be unable to reduce the cost of our modems sufficiently to enable us to
compete with other cable modem suppliers. Our cost reduction efforts may not
allow us to keep pace with competitive pricing pressures or lead to gross margin
improvement.

Some of our competitors are larger and manufacture products in significantly
greater quantities than we intend to for the foreseeable future. Consequently,
these competitors have more leverage in obtaining favorable pricing from
suppliers and manufacturers. In order to remain competitive, we must
significantly reduce the cost of manufacturing our cable modems through design
and engineering changes. We may not be successful in redesigning our products.
Even if we are successful, our redesign may be delayed or may contain
significant errors and product defects. In addition, any redesign may not
result in sufficient cost reductions to allow us to significantly reduce the
list price of our products or improve our gross margin. Reductions in our
manufacturing costs will require us to use more highly integrated components in
future products and may require us to enter into high volume or long-term
purchase or manufacturing agreements. Volume purchase or manufacturing
agreements may not be available on acceptable terms. We could incur expenses
without related revenues if we enter into a high volume or long-term purchase or
manufacturing agreement and then decide that we cannot use the products or
services offered by such agreement.

We Must Keep Pace with Rapid Technological Change to Remain Competitive.

The markets for our products are characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements. Our future success will depend upon our
ability to enhance our existing products and to develop and introduce new
products that achieve market acceptance. Providers of broadband access services
may adopt alternative technologies or they may deploy alternative services that
are incompatible with our products.

The demand for broadband access services has resulted in the development of
several competing modulation technologies. Our products utilize a modulation
technology known as Synchronous Code Division Multiple Access or "S-CDMA," while
several of our competitors utilize modulation technologies known as Time
Division Multiple Access or "TDMA" and Frequency Division Multiple Access or
"FDMA." Our headend equipment and cable modem products currently are not
interoperable with the headend equipment and modems of other suppliers of
broadband access products. As a result, potential customers who wish to
purchase broadband access products from multiple suppliers may be reluctant to
purchase our products. Although our technology may be incorporated into a
future version of a DOCSIS specification or another industry standard, we cannot
be certain that major cable operators will adopt these standards. Major cable
operators may not adopt products or technologies based on our current
proprietary S-CDMA technology or on any future industry standard S-CDMA
technology. Further, major cable operators may adopt products or standards
technologies based on competing modulation technologies. If

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competitors using other modulation technologies can incorporate functionality
and capabilities currently found in S-CDMA, the value of our S-CDMA technology
would be diminished.

Broadband Access Services Have Not Achieved Widespread Market Acceptance and
Many Competing Technologies Exist.

Our success will depend upon the widespread commercial acceptance of
broadband access services by service providers and end users of broadband access
services. The market for these services is not fully developed. We cannot
accurately predict the future growth rate or the ultimate size of the market for
broadband access services. Potential users of our products may have concerns
regarding the security, reliability, cost, ease of installation and use and
capability of cable modems in general.

The market for our products may be impacted by the development of other
technologies that enable the provisioning of broadband access services and the
deployment of services over other media. Widespread acceptance of other
technologies or deployment of services over media not supported by our products
could materially limit acceptance of our broadband access systems. Broadband
access services based on our products and technology may fail to gain widespread
commercial acceptance by providers of broadband access services and end users.
In addition, we only recently began to offer products based on alternate
technologies such as DSL. We may not be successful in marketing and selling
these products.

We Need to Develop Additional Distribution Channels.

We presently market our TeraComm system to cable operators and systems
integrators. We believe that much of the North American cable modem market may
shift to a retail distribution model. Accordingly, we may need to redirect our
future marketing efforts to sell our cable modems directly to retail
distributors and end users. This shift would require us to establish new
distribution channels for our products. We may be unable to establish these
additional distribution channels. If we do establish them, we may be unable to
hire the additional personnel necessary to foster and enhance such distribution
channels. In addition, if the cable modem market shifts to a retail
distribution model, we may not successfully establish a retail distribution
presence. To the extent that large consumer electronics companies enter the
cable modem market, their well-established retail distribution capabilities
would provide them with a significant competitive advantage

We May Be Unable to Market Effectively to Broadband Access Service Providers.

Our growth and future success will be substantially dependent upon our
ability to convince providers of broadband access services to adopt our
technologies, purchase our products and effectively market our products to end
users. Our potential customers are likely to prefer purchasing products from
established manufacturing companies that can demonstrate the capability to
supply large volumes of products on short notice. In addition, many of our
potential customers may be reluctant to adopt technologies that have not gained
acceptance among other providers of similar services. This reluctance could
result in lengthy product testing and acceptance cycles for our products.
Consequently, the impediments to our initial sales may be even greater than
those to later sales.

No established distribution network in the cable modem industry exists that
would provide us with easy access to smaller or geographically diverse cable
operators. Therefore, our initial sales to larger, more established cable
operators are critical to our business. Although we intend to establish
strategic relationships with leading distributors worldwide, we may not succeed
in establishing these relationships. Even if we do establish these
relationships, the distributors may not succeed in marketing our products to
cable operators. Some of our competitors have already established relationships
with certain cable operators, such as Motorola, Inc.'s relationships with Tele-
Communications, Inc. or "TCI," Time Warner Cable, Comcast Corporation and Cox
Communications, Inc. These established relationships may further limit our
ability to sell products to those cable operators. We do not have long, well-
established relationships with those cable operators. If we were to sell our
products to those cable operators, it would likely not be based on long-term
contracts and those customers would be able to terminate their relationships
with us at any time. In addition, one or more of our current customers could
cancel its relationship with us at any time.

We have recently begun marketing and selling our products to providers of DSL
broadband services and thus we have very limited experience. We do not have
long, well-established relationships with these telephony providers and we may
not be successful in establishing these relationships.

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We Are Dependent on Cable Operators and Other Service Providers.

We depend on cable operators to purchase our cable modem systems and to
provide our cable modems to end users. Cable operators have a limited amount of
available bandwidth over which they can offer robust data services, and they may
not choose to provide these data services to their customers. If cable
operators choose to provide these services, we also will depend upon them to
market these services to cable customers, to install our equipment and to
provide support to end users. In addition, we will be highly dependent on cable
operators to continue to maintain their cable infrastructure in a manner that
allows us to provide consistently high performance and reliable services. Our
success also will depend upon the acceptance of our products by other providers
of services to the cable industry, such as Excite@ Home's @Home Network and Road
Runner, a joint venture between MediaOne Group, Inc. and Time Warner Cable.

We Are Dependent on the Cable Industry to Upgrade to Two-Way Cable
Infrastructure.

Demand for our products will depend to a significant degree upon the
magnitude and timing of capital spending by cable operators for implementation
of access systems for data transmission over cable networks. This involves the
enabling of two-way transmission over existing coaxial cable networks and the
eventual upgrade to HFC in areas of higher penetration of data services. If
cable operators fail to complete these upgrades of their cable infrastructures
in a timely and satisfactory manner, the market for our products could be
limited. In addition, few businesses in the United States currently have cable
access. Cable operators may not choose to upgrade existing residential cable
systems or to install new cable systems to serve business locations.

The success and future growth of our business will be subject to economic and
other factors affecting the cable television industry generally, particularly
its ability to finance substantial capital expenditures. Capital spending
levels in the cable industry in the United States have fluctuated significantly
in the past, and we believe that such fluctuations will occur in the future.
The capital spending patterns of cable operators are dependent on a variety of
factors, including the following:

. the availability of financing;

. cable operators' annual budget cycles, as well as the typical reduction in
upgrade projects during the winter months;

. the status of federal, local and foreign government regulation and
deregulation of the telecommunications industry;

. overall demand for cable services;

. competitive pressures (including the availability of alternative data
transmission and access technologies);

. discretionary consumer spending patterns; and

. general economic conditions.

In recent periods, the United States cable market has been characterized by
the acquisition of smaller and independent cable operators by large cable
operators. We cannot predict the effect, if any, that consolidation in the
United States cable industry will have on overall capital spending patterns by
cable operators. The effect on our business of further industry consolidation
also is uncertain.

We Are Dependent on Contract Manufacturers.

We depend heavily upon the manufacturing capabilities of our contract
manufacturers. The emerging nature of the cable modem market makes it difficult
for us to accurately forecast demand for our products. Our inability to
accurately forecast the actual demand for our products could result in supply,
manufacturing or testing capacity constraints. These constraints could result
in delays in the delivery of our products or the loss of existing or potential
customers, either of which could negatively impact our business, operating
results or financial condition. In addition, we had unconditional purchase
obligations of approximately $125.7 million as of March 31, 2000,

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<PAGE>

primarily to purchase minimum quantities of materials and components used to
manufacture our products. We must fulfill these obligations even if demand for
our products is lower than we anticipate.

We Are Dependent on Key Suppliers.

We manufacture all of our products using components or subassemblies procured
from third-party suppliers. Some of these components are available from a single
source and others are available from limited sources. All of our sales are from
products containing one or more components that are available only from single
supply sources. In addition, some of the components are custom parts produced to
our specifications. For example, we currently rely on Philips Semiconductors,
Inc. to supply a custom ASIC that is used in our products. Other components,
such as the radio frequency tuner and some surface acoustic wave filters, are
procured from sole source suppliers. Any interruption in the operations of
vendors of sole source parts could adversely affect our ability to meet our
scheduled product deliveries to customers. Delays in key component or product
deliveries may occur due to shortages resulting from a limited number of
suppliers, the financial or other difficulties of such suppliers or a limitation
in component product availability. We are dependent on semiconductor
manufacturers and are affected by worldwide conditions in the semiconductor
market. If we are unable to obtain a sufficient supply of components from our
current sources, we could experience difficulties in obtaining alternative
sources or in altering product designs to use alternative components. Resulting
delays or reductions in product shipments could damage customer relationships.
Further, a significant increase in the price of one or more of these components
could harm our gross margin or operating results.

Due to increasing demand for electronic and communications equipment, the
worldwide market for component parts is currently constrained. Due to the
current market conditions, we may be unable to obtain a sufficient supply of
component parts necessary to manufacture products to meet the current or future
demand of our customers. If we are unable to satisfy our customers demand, our
relationships with our customers may be damaged and our customers could decide
to purchase product from our competitors. Inability to meet demand or a
decision by one or more of our customers to purchase from our competitors could
harm our operating results.

We Must Transition to New Semiconductor Process Technologies.

Our future success will depend in part upon our ability to develop products
that utilize new semiconductor process technologies. These technologies change
rapidly and require us to spend significant amounts on research and development.
We continuously evaluate the benefits of redesigning our integrated circuits
using smaller geometry process technologies to improve performance and reduce
costs. The transition of our products to integrated circuits with increasingly
smaller geometries will be important to our competitive position. Other
companies have experienced difficulty in migrating to new semiconductor
processes and, consequently, have suffered reduced yields, delays in product
deliveries and increased expense levels. Moreover, we depend on our
relationship with our third-party manufacturers to migrate to smaller geometry
processes successfully. We may be unable to migrate to new semiconductor
process technologies successfully or on a timely basis.

We Are Dependent on Contract Manufacturers to Assemble and Test Our Products.

Most of our products are assembled and tested by contract manufacturers using
testing equipment that we provide. As a result of our dependence on these
contract manufacturers for assembly and testing of our products, we do not
directly control product delivery schedules or product quality. Any product
shortages or quality assurance problems could increase the costs of manufacture,
assembly or testing of our products. In addition, as manufacturing volume
increases, we will need to procure and assemble additional testing equipment and
provide it to our contract manufacturers. The production and assembly of
testing equipment typically requires significant time. We could experience
significant delays in the shipment of our products if we are unable to provide
this testing equipment to our contract manufacturers in a timely manner.

There Are Many Risks Associated with International Operations.

Sales to customers outside of the United States accounted for approximately
84% of our revenues in 1999 and approximately 74% of our revenues in 1998. We
expect sales to customers outside of the United States to continue to represent
a significant percentage of our revenues for the foreseeable future.
International sales are subject to a number of risks, including the following:

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. changes in foreign government regulations and communications standards;

. export license requirements, tariffs and taxes;

. other trade barriers;

. difficulty in collecting accounts receivable;

. difficulty in managing foreign operations; and

. political and economic instability.

If our customers are impacted by currency devaluations or general economic
crises, such as the recent economic crisis affecting many Asian and Latin
American economies, their ability to purchase our products could be
significantly reduced. Payment cycles for international customers typically are
longer than those for customers in the United States. Foreign markets for our
products may develop more slowly than currently anticipated. Foreign countries
may decide not to construct cable infrastructure or may prohibit, terminate or
delay the construction of new cable plants for a variety of reasons. These
reasons include environmental issues, economic downturns, the availability of
favorable pricing for other communications services or the availability and cost
of related equipment. Any action like this by foreign countries would reduce the
market for our products.

We anticipate that our foreign sales generally will be invoiced in U.S.
dollars, and we currently do not plan to engage in foreign currency hedging
transactions. However, as we commence and expand our international operations,
we may be paid in foreign currencies and exposure to losses in foreign currency
transactions may increase. We may choose to limit our exposure by the purchase
of forward foreign exchange contracts or through similar hedging strategies. No
currency hedging strategy can fully protect against exchange-related losses. In
addition, if the relative value of the U.S. dollar in comparison to the currency
of our foreign customers should increase, the resulting effective price increase
of our products to those foreign customers could result in decreased sales.

We May Be Unable to Provide Adequate Customer Support.

Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our broadband access systems, particularly in the initial
deployment and implementation stage. To date our sales have been concentrated in
a small number of customers. We have limited experience with widespread
deployment of our products to a diverse customer base. We may not have adequate
personnel to provide the levels of support that our customers may require during
initial product deployment or on an ongoing basis. Our inability to provide
sufficient support to our customers could delay or prevent the successful
deployment of our products. In addition, our failure to provide adequate support
could harm our reputation and relationship with our customers and could prevent
us from gaining new customers.

Our Industry is Highly Competitive with Many Established Competitors.

The market for broadband access systems is extremely competitive and is
characterized by rapid technological change. Our direct competitors in the cable
access systems arena include Cisco Systems, Com21, General Instrument,
Matsushita Electric Industrial (which markets products under the brand name
"Panasonic"), Motorola, Nortel Networks, Phasecom, Thomson Consumer Electronics
(which markets products under the brand name "RCA"), Samsung, Scientific-
Atlanta, Sony, 3Com, Toshiba and Zenith Electronics. We also compete with
companies that develop integrated circuits for broadband access products, such
as Broadcom. We also sell products that compete with existing data access and
transmission systems utilizing the telecommunications networks, such as those of
3Com. Additionally, our controller and headend system products face intense
competition from well-established companies such as Cisco, Nortel and 3Com. In
addition, we compete with companies in the DSL arena such as ECI, Charles
Industries, Pairgain, Copper Mountain, Accelerated Networks, Integral Access and
Vina Technologies. As standards, such as DOCSIS, are developed for broadband
access systems, other companies may enter the broadband access systems market.
The principal competitive factors in our market include the following:

* product performance, features and reliability;

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<PAGE>

. price;

. size and stability of operations;

. breadth of product line;

. sales and distribution capability;

. technical support and service;

. relationships with providers of broadband access services; and

. compliance with industry standards.

Some of these factors are outside of our control. The existing conditions
in the broadband access market could change rapidly and significantly as a
result of technological changes. The development and market acceptance of
alternative technologies could decrease the demand for our products or render
them obsolete. Our competitors may introduce broadband access products that are
less costly, provide superior performance or achieve greater market acceptance
than our products.

Many of our current and potential competitors have significantly greater
financial, technical, marketing, distribution, customer support and other
resources, as well as greater name recognition and access to customers than we
do. The anticipated widespread adoption of DOCSIS is likely to cause increased
price competition in the North American market. The adoption of DOCSIS also
could result in lower sales of our headend products in the North American
market. Any increased price competition or reduction in sales of our headend
products would result in downward pressure on our gross margin. We cannot
accurately predict how the competitive pressures that we face will affect our
business.

Our Business Is Dependent on the Internet and the Development of the Internet
Infrastructure.

Our success will depend in large part on increased use of the Internet to
increase the need for high speed broadband access networks. Critical issues
concerning the commercial use of the Internet remain largely unresolved and are
likely to affect the development of the market for our products. These issues
include security, reliability, cost, ease of access and quality of service. Our
success also will depend on the growth of the use of the Internet by businesses,
particularly for applications that utilize multimedia content and thus require
high bandwidth. The recent growth in the use of the Internet has caused frequent
periods of performance degradation. This has required the upgrade of routers,
telecommunications links and other components forming the infrastructure of the
Internet by Internet service providers and other organizations with links to the
Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our products. Potentially increased
performance provided by our products and the products of others ultimately is
limited by and reliant upon the speed and reliability of the Internet backbone
itself. Consequently, the emergence and growth of the market for our products
will depend on improvements being made to the entire Internet infrastructure to
alleviate overloading and congestion.

Our Failure to Manage Growth Could Adversely Affect Us.

The growth of our business has placed, and is expected to continue to
place, a significant strain on our limited personnel, management and other
resources. Our management, personnel, systems, procedures and controls may be
inadequate to support our existing and future operations. To manage any future
growth effectively, we will need to attract, train, motivate, manage and retain
employees successfully, to integrate new employees into our overall operations
and to continue to improve our operational, financial and management systems.

We Are Dependent on Key Personnel.

Due to the specialized nature of our business, we are highly dependent on
the continued service of, and on the ability to attract and retain qualified
engineering, sales, marketing and senior management personnel. The competition
for personnel is intense. The loss of any of these persons, particularly our
Chairman, President and

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<PAGE>

Chief Technical Officer, Shlomo Rakib, and our Chief Executive Officer, Zaki
Rakib, would harm our business. In addition, if we are unable to hire additional
qualified personnel as needed, we may be unable to adequately manage and
complete our existing sales commitments and to bid for and execute additional
sales. Further, we must train and manage our growing employee base, which is
likely to require increased levels of responsibility for both existing and new
management personnel. Our current management personnel and systems may be
inadequate, and we may fail to assimilate new employees successfully.

Highly skilled employees with the education and training that we require,
especially employees with significant experience and expertise in both data
networking and radio frequency design, are in high demand. We may not be able to
continue to attract and retain the qualified personnel necessary for the
development of our business. We do not have "key person" insurance coverage for
the loss of any of our employees. Any officer or employee of our company can
terminate his or her relationship with us at any time. Our employees generally
are not bound by non-competition agreements with us.

Our Business Is Subject to the Risks of Product Returns, Product Liability and
Product Defects.

Products as complex as ours frequently contain undetected errors or
failures, especially when first introduced or when new versions are released.
Despite testing, errors may occur. The occurrence of errors could result in
product returns and other losses to our company or our customers. This
occurrence also could result in the loss of or delay in market acceptance of our
products. Due to the recent introduction of our products, we have limited
experience with the problems that could arise with this generation of products.
Our purchase agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims. However, the
limitation of liability provision contained in our purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries. We have
not experienced any product liability claims to date, but the sale and support
of our products entails the risk of such claims. In addition, any failure by our
products to properly perform could result in claims against us by our customers.
We maintain insurance to protect against certain claims associated with the use
of our products, but our insurance coverage may not adequately cover any claim
asserted against us. In addition, even claims that ultimately are unsuccessful
could result in our expenditure of funds in litigation and management time and
resources.

We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.

We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights in
our products. Our pending patent applications may not be granted. Even if they
are granted, the claims covered by the patents may be reduced from those
included in our applications. Any patent might be subject to challenge in court
and, whether or not challenged, might not be broad enough to prevent third
parties from developing equivalent technologies or products without taking a
license from us. We have entered into confidentiality and invention assignment
agreements with our employees, and we enter into non-disclosure agreements with
some of our suppliers, distributors and appropriate customers so as to limit
access to and disclosure of our proprietary information. These statutory and
contractual arrangements may not prove sufficient to prevent misappropriation of
our technology or to deter independent third-party development of similar
technologies. In addition, the laws of some foreign countries might not protect
our products or intellectual property rights to the same extent as do the laws
of the United States. Protection of our intellectual property might not be
available in every country in which our products might be manufactured, marketed
or sold.

We would contribute our technology pursuant to a license agreement with
CableLabs that we would execute at that time, and which contains the terms that
CableLabs has established for the inclusion of any intellectual property from
any source in the DOCSIS specifications. Under the terms of the proposed license
agreement, we would grant

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to CableLabs a royalty-free license for those aspects of our S-CDMA technology
that are essential for compliance with the DOCSIS cable modem standard.
So-called "implementation know how" is not covered by this license-only those
aspects of the technology that are essential to implementing a compliant
product. CableLabs would have the right to extend royalty-free sublicenses to
companies that wish to build DOCSIS-compatible products. These sublicenses would
allow participating companies to utilize and incorporate the essential portions
of the S-CDMA technology on a royalty-free basis for the limited use of making
and selling products or systems that comply with the DOCSIS cable modem
specification. Terayon has already joined the DOCSIS intellectual property pool
and, as a result, we have a royalty-free sublicense that allows us to ship
DOCSIS-compatible products which contain intellectual property submitted by
other companies. The scope of this license would not extend to the use of the S-
CDMA technology in other areas; only for products that comply with the DOCSIS
specifications. As a result, any of our competitors who join or have joined the
DOCSIS intellectual property pool will have access to some aspects of our
technology without being required to pay us any royalties or other compensation.
If and when we submit S-CDMA to the DOCSIS Intellectual Property pool, we are in
no way restricted from entering into royalty-bearing license agreements with
companies that wish to use the S-CDMA technology for purposes other than
implementing DOCSIS compatible products, or that do not wish to enter into the
DOCSIS intellectual property pool. Further, some of our competitors have been
successful in reverse engineering the technology of other companies, and the
inclusion of S-CDMA in a future DOCSIS specification would expose some aspects
of our technology to those competitors. DOCSIS specifications are available on
an open basis once they are approved, not only to companies that are members of
the DOCSIS IP Pool. If a competitor is able to duplicate the functionality and
capabilities of our technology, we could lose all or some of the time-to-market
advantage we might otherwise have. Under the terms of the proposed license
agreement, if we sue certain parties to the proposed license agreement on claims
of infringement of any copyright or patent right or misappropriation of any
trade secret, those parties may terminate our license to the patents or
copyrights they contributed to the DOCSIS intellectual property pool. If a
termination like this were to occur, we would continue to have access to some
aspects of the DOCSIS intellectual property pool, but we would not be able to
develop products that fully comply with the DOCSIS cable modem specification.
Also, even if we were to be removed from the IP pool, we would not be prevented
from developing and selling products that fully comply with the DOCSIS
specifications, but we would not be able to do this with the benefit of a
royalty-free license, which would increase the cost of our products, assuming we
were able to obtain a license agreement for the required technology. Because of
these terms, we may find it difficult to enforce our intellectual property
rights against certain companies, even in areas that are not directly related to
DOCSIS specifications and products.

We anticipate that developers of cable modems increasingly will be subject
to infringement claims as the number of products and competitors in our industry
segment grows. We have received letters from two individuals claiming that our
technology infringes patents held by these individuals. We have reviewed the
allegations made by these individuals and, after consulting with our patent
counsel, we do not believe that our technology infringes any valid claim of
these individuals' patents. If the issues are submitted to a court, the court
could find that our products infringe these patents. In addition, these
individuals may continue to assert infringement. If we are found to have
infringed these individuals' patents, we could be subject to substantial damages
and/or an injunction preventing us from conducting our business. In addition,
other third parties may assert infringement claims against us in the future. An
infringement claim, whether meritorious or not, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements may not
be available on terms acceptable to us or at all. Litigation also may be
necessary to enforce our intellectual property rights.

We pursue the registration of our trademarks in the United States and have
applications pending to register several of our trademarks. However, the laws of
certain foreign countries might not protect our products or intellectual
property rights to the same extent as the laws of the United States. This means
that effective trademark, copyright, trade secret and patent protection might
not be available in every country in which our products might be manufactured,
marketed or sold.

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Our Business Is Subject to Communications Industry Regulations.

Our business and our customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the Federal Communications
Commission extends to the communications industry, including our broadband
access products. The FCC has promulgated regulations that, among other things,
set installation and equipment standards for communications systems. Although
FCC regulations and other governmental regulations have not materially
restricted our operations to date, future regulations applicable to our business
or our customers could be adopted by the FCC or other regulatory bodies. For
example, FCC regulatory policies affecting the availability of cable services
and other terms on which cable companies conduct their business may impede our
penetration of certain markets. In addition, regulation of cable television
rates may affect the speed at which cable operators upgrade their cable
infrastructures to two-way HFC. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards for such products and services. This process generally
involves extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past, and may in the future, cause the cancellation, postponement or
rescheduling of the installation of communications systems by our customers.

If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which our products do not comply,
we will be unable to offer products in those countries until our products comply
with those standards or specifications. In addition, we may have to incur
substantial costs to comply with those standards or specifications. For
instance, should the DAVIC standards for ATM-based digital video be established
internationally, we will need to conform our cable modems to compete. Further,
many countries do not have regulations for installation of cable modem systems
or for upgrading existing cable network systems to accommodate our products.
Whether we currently operate in a country without these regulations or enter
into the market in a country these regulations do not exist, new regulations
could be proposed at any time. The imposition of regulations like this could
place limitations on a country's cable operators' ability to upgrade to support
our products. Cable operators in these countries may not be able to comply with
these regulations, and compliance with these regulations may require a long,
costly process. For example, we experienced delays in product shipments to a
customer in Brazil due to delays in certain regulatory approvals in Brazil.
Similar delays could occur in other countries in which we market or plan to
market our products. In addition, our customers in certain parts of Asia, such
as Japan, are required to obtain licenses prior to selling our products, and
delays in obtaining required licenses could harm our ability to sell products to
these customers.

Our Business Is Subject to Other Regulatory Approvals and Certifications.

In the United States, in addition to complying with FCC regulations, our
products are required to meet certain safety requirements. For example, we are
required to have our products certified by Underwriters Laboratory in order to
meet federal requirements relating to electrical appliances to be used inside
the home. Outside the United States, our products are subject to the regulatory
requirements of each country in which the products are manufactured or sold.
These requirements are likely to vary widely. We may be unable to obtain on a
timely basis or at all the regulatory approvals that may be required for the
manufacture, marketing and sale of our products. In addition to regulatory
compliance, some cable industry participants may require certification of
compatibility.

Our Business Is Subject to The Risk of Earthquakes and/or Other Natural
Disasters.

The facility housing our corporate headquarters, the majority of our
research and development activities and our in-house manufacturing operations
are located in an area of California known for seismic activities. In addition,
the operations of some of our key suppliers are also located in this area and in
other areas know for seismic activity, such as Taiwan. An earthquake, or other
significant natural disaster, could result in an interruption in our business or
that of one or more of our key suppliers. Such an interruption could harm our
operating results.

Our Stock Price Has Been and Is Likely to Continue to Be Volatile.

The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:

* Actual or anticipated variations in quarterly operating results;

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* Announcements of technological innovations;

* New products or services offered by us or our competitors;

* Changes in financial estimates by securities analysts;

* Conditions or trends in the broadband access services industry;

* Changes in the economic performance and/or market valuations of Internet,
online service or broadband access service industries;

* Changes in the economic performance and/or market valuations of other
Internet, online service or broadband access service companies;

* Our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;

* Adoption of industry standards and the inclusion of or compatibility of
our technology with such standards;

* Adverse or unfavorable publicity regarding us or our products;

* Additions or departures of key personnel;

* Sales of common stock; and

* Other events or factors that may be beyond our control.

In addition, the stock markets in general, and the Nasdaq National Market
and the market for broadband access services and technology companies in
particular, have experienced extreme price and volume volatility and a
significant cumulative decline in recent months. This volatility and decline has
affected many companies irrespective of or disproportionately to the operating
performance of these companies. Our stock price has declined significantly in
recent weeks and these broad market and industry factors may materially
adversely further affect the market price of our common stock, regardless of our
actual operating performance.

On April 13, 2000, a lawsuit against us and certain of our officers and
directors, entitled Birnbaum v. Terayon Comm. Systems, Inc., was filed in the
United States District Court for the Central District of California. The
plaintiff purports to be suing on behalf of a class of stockholders who
purchased or committed to purchase our securities during the period from
February 2, 2000 to April 11, 2000. The complaint alleges that the defendants
violated the federal securities laws by issuing materially false and misleading
statements and failing to disclose material information regarding our
technology. Several other lawsuits similar to the Birnbaum suit have since been
filed. The lawsuits seek an unspecified amount of damages, in addition to other
forms of relief. We consider the lawsuits to be without merit and we intend to
defend vigorously against these allegations.

17
<PAGE>

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
intend to retain any future earnings to support operations and to finance the
growth and development of our business and we do not anticipate paying cash
dividends for the foreseeable future.

WHERE YOU CAN GET MORE INFORMATION

We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy these
reports, proxy statements and other information at the SEC's public reference
rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C., as well as at the
SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, Suite 1300, New York, NY 10048. You can request
copies of these documents by writing to the SEC and paying a fee for the copying
cost. Please call the SEC at 1-800-SEC-0330 for more information about the
operation of the public reference rooms. Our SEC filings are also available at
the SEC's web site at "http://www.sec.gov." In addition, you can read and copy
our SEC filings at the office of the National Association of Securities Dealers,
Inc. at 1735 "K" Street, Washington, D.C. 20006.

The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:

. Annual Report on Form 10-K for the year ended December 31, 1999, as
amended on Form 10-K/A filed on April 28, 2000;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;

. Current Report on Form 8-K, filed May 3, 2000, amended on Form 8-K/A
filed on May 8, 2000 and amended on Form 8-K/A filed on June 29,
2000; and
. The description of the common stock contained in our Registration
Statement on Form 8-A, as filed on July 20, 1998 with the SEC.

You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:

Terayon Communication Systems, Inc.
2952 Bunker Hill Lane
Santa Clara, CA 95054
(408) 727-4400

This prospectus is part of a Registration Statement we filed with the SEC.
You should rely only on the information incorporated by reference or provided in
this prospectus and the Registration Statement. We have authorized no one to
provide you with different information. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of the document.

18
<PAGE>

SELLING STOCKHOLDERS

In the four stock acquisition transactions that we consummated in April
2000, we issued to all of the selling stockholders shares of our common stock,
and we agreed to register all of those shares for resale. We also agreed to use
reasonable efforts to keep the registration statement effective until the
earliest of the date the shares of common stock offered under this prospectus
have been sold to the public and the date one year from the date of
effectiveness of this prospectus. Our registration of the shares of common stock
does not necessarily mean that the selling stockholders will sell all or any of
the shares.

The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of June 27, 2000, by each of the selling
stockholders.

The information provided in the table below with respect to each selling
stockholder has been obtained from that selling stockholder. Except as otherwise
disclosed below, none of the selling stockholders has, or within the past three
years has had, any position, office or other material relationship with us.
Because the selling stockholders may sell all or some portion of the shares of
common stock beneficially owned by them, we cannot estimate the number of shares
of common stock that will be beneficially owned by the selling stockholders
after this offering. In addition, the selling stockholders may have sold,
transferred or otherwise disposed of, or may sell, transfer or otherwise dispose
of, at any time or from time to time since the date on which they provided the
information regarding the shares of common stock beneficially owned by them, all
or a portion of the shares of common stock beneficially owned by them in
transactions exempt from the registration requirements of the Securities Act of
1933.

Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Commission under the Securities Exchange Act of 1934. Unless
otherwise noted, each person or group identified possesses sole voting and
investment power with respect to shares, subject to community property laws
where applicable. None of the share amounts set forth below represents more than
1% of our outstanding stock as of June 27, 2000, adjusted as required by rules
promulgated by the SEC.

<TABLE>
<CAPTION>
Number of Shares Being Shares Held in
Selling Stockholder Shares Offered Escrow
----------------------------------------------------------------- ----------- ------------- ----------------
<S> <C> <C> <C>
IES Electronics Industries Ltd. 430,198 430,198 53,814
Schmuel Arditi Assets Ltd. 63,980 63,980 8,000
Mrs. Sarah Shalev 10,014 10,014 1,256
Mr. Moshe H. Ne'eman 3,220 3,220 402
Mr. Chen Agam 1,068 1,068 140
Ascend Technology Ventures L.P. 180,854 180,854 22,618
Ascend Partners L.P. 230 230 28
George Needham 76 76 8
Frank Quattrone 60 60 8
Sun America Investment Inc. 3,054 3,054 382
ATV Nominee Trust 152 152 20
Needham Company Inc. 152 152 20
J.R. Fennel L.P. 1,224 1,224 152
Yuri Shtivelman 30 30 4
Ray Stata 1,558 1,558 194
Addison Ventures L.P. 152 152 20
BP-5 L.L.C. 1,526 1,526 192
Franco Tosi Finance S.A. 152 152 20
The Technology and Growth Fund Limited Partnership 17,278 17,278 2,154
IES Electronics Advanced Investments (1997) Ltd. 71,800 71,800 8,974
M.T. Gibor Assets Ltd. 3,376 3,376 418
Ophir Holdings Ltd. 268,424 268,424 33,574
Mrs. Revital Ben-Artzi 1,382 1,382 170
C.T.P. Systems Ltd. 78,436 78,436 9,812
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
Number of Shares Being Shares Held in
Selling Stockholder Shares Offered Escrow
----------------------------------------------------------------- ----------- ------------- ----------------
<S> <C> <C> <C>
Feuchtwanger Energy Ventures L.P. 66,372 66,372 8,308
The Technology and Growth Fund for the Middle East L.P. 25,906 25,906 3,240
Mr. Raul Asia 8,530 8,530 1,070
Kost, Levary & Forer Trust Company (1992) Ltd., as
trustee for ComBox's Employees' Vested Options 138,840 138,840
Kost, Levary & Forer Trust Company (1992) Ltd. Employees'
Additional Shares 14,112 14,112
</TABLE>

* 138,840 shares of common stock held in escrow are being held in the name of
Mr. Robert Levy, as Seller's Representative.

20
<PAGE>

PLAN OF DISTRIBUTION

The shares of common stock may be sold from time to time by the selling
stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. As used in this prospectus, "selling stockholders" includes
donees, pledgees, transferees and other successors in interest selling shares
received from a selling stockholder after the date of this prospectus as a gift,
pledge, partnership distribution or other non-sale transfer. Upon receiving
notice from a selling stockholder that a donee, pledgee, transferee or other
successor in interest intends to sell more than 500 shares, we will file a
supplement to this prospectus. The selling stockholders may offer their shares
of common stock in one or more of the following transactions:

. on any national securities exchange or quotation service on which the
common stock may be listed or quoted at the time of sale, including the
Nasdaq National Market,

. in the over-the-counter market,

. in private transactions,

. through options,

. by pledge to secure debts and other obligations or

. a combination of any of the above transactions.

If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.

The shares of common stock described in this prospectus may be sold from
time to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933. Any profits on the resale of shares of common
stock and any compensation received by any underwriter, broker/dealer or agent
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933. We have agreed to indemnify each selling stockholder against
certain liabilities, including liabilities arising under the Securities Act of
1933. The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in the sale of shares of common stock described
in this prospectus against certain liabilities, including liabilities arising
under the Securities Act of 1933.

Any shares covered by this prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares they hold. The selling stockholders may transfer, devise or gift such
shares by other means not described in this prospectus.

To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the shares of common stock may
not be offered or sold unless they have been registered or qualified for sale or
an exemption is available and complied with.

Under the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock may not simultaneously engage in market-making
activities with respect to the common stock for five business days prior to the
start of the distribution. In addition, each selling stockholder and any other
person participating in a distribution will be subject to the Securities
Exchange Act of 1934, which may limit the timing of purchases and sales of
common stock by the selling stockholders or any such other person. These factors
may affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.

All expenses of this registration, estimated at approximately $101,134,
will be paid by us. These expenses include the SEC's filing fees and fees under
state securities or "blue sky" laws.

21
<PAGE>

LEGAL MATTERS

For the purpose of this offering, Cooley Godward llp, San Francisco,
California, is giving an opinion as to the validity of the common stock offered
by this prospectus.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K for
the year ended December 31, 1999, as set forth in their reports, which are
incorporated by reference in the prospectus and elsewhere in the registration
statement. Our financial statement and schedule are incorporated by reference in
reliance of Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.

The audited historical statements of assets acquired and liabilities
assumed and of net sales and direct costs and operating expenses of the Access
Network Electronics business of Tyco Electronics Corporation as of and for the
year ended June 30, 1999 incorporated in this Registration Statement by
reference to the Current Report on Form 8-K/A of Terayon Communication Systems,
Inc. have been so incorporated in reliance on the report (which contains an
explanatory paragraph relating to the limited presentation of such statements,
as discussed in Note 2 to the statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

The financial statements of Telegate Ltd., appearing in Terayon
Communication System, Inc.'s current Report on Form 8-K/A filed June 29, 2000,
have been audited by Kost Forer & Gabbay (a member of Ernst & Young
International), independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such financial authority
of such firm as experts in accounting and auditing.

The financial statements of ComBox Ltd., appearing in Terayon Communication
System, Inc.'s current Report on Form 8-K/A filed June 29, 2000, have been
audited by Kost Forer & Gabbay (a member of Ernst & Young International),
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial authority of such firm as
experts in accounting and auditing.

22
<PAGE>

We have not authorized any dealer, sales person or
other person to give any information or to make any
representations other than those contained in this
prospectus or any prospectus supplement. You must not
rely on any unauthorized information. This
prospectus is not an offer of these securities in any
state where an offer is not permitted. The
information in this prospectus is current as of
________, 2000. You should not assume that this 1,547,770 SHARES
prospectus is accurate as of any other date.
COMMON STOCK

PROSPECTUS

TERAYON COMMUNICATION SYSTEMS, INC.

________, 2000

</TABLE>

TABLE OF CONTENTS PAGE
<S> <C>
Prospectus Summary.............................................. 1
Forward-Looking Statements...................................... 1
Risk Factors.................................................... 4
Use of Proceeds.................................................. 18
Dividend Policy.................................................. 18
Where You Can Find More Information.............................. 18
Selling Stockholders............................................. 19
Plan of Distribution............................................. 21
Legal Matters.................................................... 22
Experts.......................................................... 22

</TABLE>

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, all of which will be
paid by us, in connection with the distribution of our common stock being
registered. All amounts are estimated, except the SEC registration fee:

<TABLE>
<S> <C>
SEC registration fee............................. $ 51,134
Accounting fees.................................. 10,000
Legal fees and expenses.......................... 15,000
Miscellaneous.................................... 5,000
Printing and engraving........................... 20,000
Total............................................ $101,134
========
</TABLE>
Item 15. Indemnification of Officers and Directors.

As permitted by Section 145 of the Delaware General Corporation Law, our
Bylaws provide that (i) we are required to indemnify our directors and executive
officers to the fullest extent permitted by the Delaware General Corporation
Law, (ii) we may, in our discretion, indemnify other officers, employees and
agents as set forth in the Delaware General Corporation Law, (iii) to the
fullest extent permitted by the Delaware General Corporation Law, we are
required to advance all expenses incurred by our directors and executive
officers in connection with a legal proceeding (subject to certain exceptions),
(iv) the rights conferred in our Bylaws are not exclusive, (v) we are authorized
to enter into indemnification agreements with our directors, officers, employees
and agents and (vi) we may not retroactively amend the Bylaws provisions
relating to indemnity.

We have entered into agreements with our directors and executive officers
that require us to indemnify such persons against expenses, judgments, fines,
settlements and other amounts that such person becomes legally obligated to pay
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was our director or officer or any of
our affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to our best
interests. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.

Item 16. Exhibits and Financial Statement Schedules.

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
5.1 Opinion of Cooley Godward LLP.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Kost Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.
23.4 Consent of Kost Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.
23.5 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1)
24.1 Power of Attorney. Reference is made to the signature page.

</TABLE>

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described in Item 14 or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
<PAGE>

indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, officers, or controlling
persons in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

We hereby undertake:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material
change to such information the registration statement;

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.

We hereby undertake that, for purposes of determining any liability under
the Securities Act of 1933, each filing of our annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to the initial bona fide offering thereof.
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe it meets all of
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on the 29th day
of June, 2000.

TERAYON COMMUNICATION SYSTEMS, INC.

By: /s/ Zaki Rakib
---------------------------
Zaki Rakib
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dr. Zaki Rakib and Ray M. Fritz, or either of
them, each with the power of substitution, his attorney-in-fact, to sign any
amendments to this Registration Statement (including post-effective amendments),
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date
----------------------------------------- ------------------------------------------------- ----------------------------
<S> <C> <C>
/s/ Zaki Rakib Chief Executive Officer and Director June 29, 2000
----------------------------------------
Dr. Zaki Rakib (Principal Executive Officer)

/s/ Ray M. Fritz Chief Financial Officer (Principal Financial and June 29, 2000
----------------------------------------
Ray M. Fritz Accounting Officer)

/s/ Shlomo Rakib President and Chairman of the Board of Directors June 29, 2000
----------------------------------------
Shlomo Rakib

/s/ Michael D'Avella Director June 29, 2000
----------------------------------------
Michael D'Avella

/s/ Alek Krstajic Director June 29, 2000
----------------------------------------
Alek Krstajic

/s/ Christopher J. Schaepe Director June 29, 2000
----------------------------------------
Christopher J. Schaepe

/s/ Lewis Solomon Director June 29, 2000
----------------------------------------
Lewis Solomon

/s/ Mark Stevens Director June 29, 2000
----------------------------------------
Mark Stevens
</TABLE>
<PAGE>

Filed pursuant to Rule 424(b)(3)
Registration No. 333-37978

(June 30, 2000)

TERAYON COMMUNICATION SYSTEMS, INC.

377,380 Shares

Common Stock

The Selling Stockholders: The selling stockholders identified in this
prospectus are selling 377,380 shares of our
common stock. We are not selling any shares of
our common stock under this prospectus and will
not receive any of the proceeds from the sale of
shares by the selling stockholders.

Offering Price: The selling stockholders may sell the shares of
common stock described in this prospectus in a
number of different ways and at varying prices.
We provide more information about how they may
sell their shares in the section titled "Plan of
Distribution" on page 25.

Trading Market: Our common stock is listed on the Nasdaq National
Market under the symbol "TERN." On June 27, 2000,
the closing sale price of our common stock, as
reported on the Nasdaq National Market, was
$70.125.

Risks: Investing in our common stock involves a high
degree of risk. See "Risk Factors" beginning on
page 4.

The date of this prospectus is June 30, 2000

Internet Telecom Tranche Page
<PAGE>

SELLING STOCKHOLDERS

In the four stock acquisition transaction that we consummated in April 2000,
we issued to all of the selling stockholders shares of our common stock, and we
agreed to register all of the shares for resale. We also agreed to use
reasonable efforts to keep the registration statement effective until the
earliest of the date the shares of common stock offered under this prospectus
have been sold to the public and the date eighteen months from the date of
effectiveness of this prospectus. Our registration of the shares of common
stock does not necessarily mean that the selling stockholders will sell all or
any of the shares.

The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of June 27, 2000 by each of the selling
stockholders.

<TABLE>
<CAPTION>
Number of Shares Being Shares Held in
Selling Stockholder Shares Offered in Escrow
--------------------------------------------------------- ---------------------- ---------------- -----------------
<S> <C> <C> <C>
Internet Telecom Ltd. 345,446 345,446 25,490
Igor Metrik 744 744
Daniel Razansky 244 244
Grigory Pasker 14 14
Vladimir Sankin 16 16
Michael Fishgang 16 16
Anton Yudkevitch 16 16
Evgeny Ostrovsky 16 16
Leonid Klebanov 16 16
Igor Baevsky 16 16
Dmitry Goroshevsky 1,902 1,902
Vladimir Ivanov 970 970
Oleg Semenov 970 970
Helen Reizentoul 324 324
Valery Gerasimov 80 80
Yuli Goryavsky 60 60
Yuri Gavrilenko 80 80
Sergey Frolov 80 80
Vladislav Bogushevitz 80 80
Ilya Pozdnov 80 80
Igor Moroz 80 80
Michael Kazatchansky 80 80
Sergey Astahov 46 46
Alexander Krivtzov 46 46
Maxim Generalov 46 46
Dmitry Vaneev 46 46
Dmitry Pavlov 46 46
Nikita Barkovsky 46 46
Yuri Briantzev 16 16
Yuri Lozovoy 38 38
Pavel Smirnov 14 14
Dmitry Naumov 46 46
Yuri Nazarov 16 16
Viacheslav Diachenko 26 26
Alexey Ozerov 16 16
Alexander Ivanov 16 16
Vadim Obedeiko 16 16
Natalia Krukova 16 16
Denis Vinogradov 16 16
Andrey Studnev 16 16
Anton Bobkov 16 16
Victor Kolesnikov 16 16
</TABLE>

Internet Telecom Tranche Page
<PAGE>

<TABLE>
<S> <C>
We have not authorized any dealer, sales person or
other person to give any information or to make
any representations other than those contained in
this prospectus or any prospectus supplement. You
must not rely on any unauthorized information.
This prospectus is not an offer of these
securities in any state where an offer is not
permitted. The information in this prospectus is
current as of June 30, 2000. You should not 377,380 SHARES
assume that this prospectus is accurate as of any
other date. COMMON STOCK

PROSPECTUS

TERAYON COMMUNICATION SYSTEMS, INC.

June 30, 2000

TABLE OF CONTENTS PAGE

Prospectus Summary................................ 1
Forward-Looking Statements........................ 1
Risk Factors...................................... 4
Use of Proceeds................................... 18
Dividend Policy................................... 18
Where You Can Find More Information............... 18
Selling Stockholders.............................. 19
Plan of Distribution.............................. 21
Legal Matters..................................... 22
Experts........................................... 22
</TABLE>

<PAGE>

Filed pursuant to Rule 424(b)(3)
Registration No. 333-37978

(June 30, 2000)

TERAYON COMMUNICATION SYSTEMS, INC.

1,404,552 Shares

Common Stock

The Selling Stockholder: The selling stockholder identified in this
prospectus is selling 1,404,552 shares of our
common stock. We are not selling any shares of our
common stock under this prospectus and will not
receive any of the proceeds from the sale of shares
by the selling stockholder.

Offering Price: The selling stockholder may sell the shares of
common stock described in this prospectus in a
number of different ways and at varying prices. We
provide more information about how it may sell its
shares in the section titled "Plan of Distribution"
on page 24.

Trading Market: Our common stock is listed on the Nasdaq National
Market under the symbol "TERN." On June 27, 2000,
the closing sale price of our common stock, as
reported on the Nasdaq National Market, was
70.125.

Risks: Investing in our common stock involves a high
degree of risk. See "Risk Factors" beginning on
page 4.

The date of this prospectus is June 30, 2000

<PAGE>

SELLING STOCKHOLDER

The selling stockholder acquired the shares being offered in consideration
for the sale to us of certain assets and liabilities of its Access Network
Electronics division in April 2000. We agreed to register the shares for
resale. We also agreed to use reasonable efforts to keep the registration
statement effective until the earliest of the date the shares of common stock
offered under this prospectus have been sold to the public, the date one year
from the date of effectiveness of this prospectus and the date when all shares
of common stock offered under this prospectus may be sold in any three month
period under Rule 144. Our registration of the shares of common stock does not
necessarily mean that the selling stockholder will sell all or any of the
shares.

The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of June 27, 2000 by the selling
stockholder.

The information provided in the table below with respect to the selling
stockholder has been obtained from the selling stockholder. Except for the
transaction mentioned above, the selling stockholder does not have and within
the past three years has not had any position, office or other material
relationship with us. Because the selling stockholder may sell all or some
portion of the shares of common stock beneficially owned by it, we cannot
estimate the number of shares of common stock that will be beneficially owned by
the selling stockholder after this offering. In addition, the selling
stockholder may have sold, transferred or otherwise disposed of, or may sell,
transfer or otherwise dispose of, at any time or from time to time since the
date on which it provided the information regarding the shares of common stock
beneficially owned by them, all or a portion of the shares of common stock
beneficially owned by it in transactions exempt from the registration
requirements of the Securities Act of 1933.

Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Commission under the Securities Exchange Act of 1934. The
selling stockholder listed below possesses sole voting and investment power with
respect to shares. Percentage ownership is based on outstanding shares of our
common stock as of June 27, 2000.

<TABLE>
<CAPTION>
Number of Percentage Shares Being
Selling Stockholder Shares Owned Offered
--------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Tyco Electronics Corporation 1,404,552 2% 1,404,552

</TABLE>

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<PAGE>

<TABLE>
<S> <C>
We have not authorized any dealer, sales person or
other person to give any information or to make
any representations other than those contained in
this prospectus or any prospectus supplement. You
must not rely on any unauthorized information.
This prospectus is not an offer of these
securities in any state where an offer is not
permitted. The information in this prospectus is
current as of June 30, 2000. You should not 1,404,552 SHARES
assume that this prospectus is accurate as of any
other date. COMMON STOCK

PROSPECTUS

TERAYON COMMUNICATION SYSTEMS, INC.

June 30, 2000

</TABLE>

TABLE OF CONTENTS PAGE

Prospectus Summary..................................... 1
Forward-Looking Statements............................. 1
Risk Factors........................................... 4
Use of Proceeds........................................ 18
Dividend Policy........................................ 18
Where You Can Find More Information..................... 18
Selling Stockholders.................................... 19
Plan of Distribution.................................... 20
Legal Matters........................................... 21
Experts................................................. 21

<PAGE>

Filed pursuant to Rule 424(b)(3)
Registration No. 333-37978

(June 30, 2000)

TERAYON COMMUNICATION SYSTEMS, INC.

536,766 Shares

Common Stock

The Selling Stockholders: The selling stockholders identified in this
prospectus are selling 536,766 shares of our common
stock. We are not selling any shares of our common
stock under this prospectus and will not receive
any of the proceeds from the sale of shares by the
selling stockholders.

Offering Price: The selling stockholders may sell the shares of
common stock described in this prospectus in a
number of different ways and at varying prices. We
provide more information about how they may sell
their shares in the section titled "Plan of
Distribution" on page 25.

Trading Market: Our common stock is listed on the Nasdaq National
Market under the symbol "TERN." On June 27, 2000,
the closing sale price of our common stock, as
reported on the Nasdaq National Market, was
$70.125.

Risks: Investing in our common stock involves a high
degree of risk. See "Risk Factors" beginning on
page 4.

The date of this prospectus is June 30, 2000

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<PAGE>

SELLING STOCKHOLDERS

In the four stock acquisition transactions that we consummated in April
2000, we issued to all of the selling stockholders shares of our common stock,
and we agreed to register all of the shares for resale. We also agreed to use
reasonable efforts to keep the registration statement effective until the
earliest of the date the shares of common stock offered under this prospectus
have been sold to the public and the date one year from the date of
effectiveness of this prospectus. Our registration of the shares of common stock
does not necessarily mean that the selling stockholders will sell all or any of
the shares.

The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of June 27, 2000 by each of the selling
stockholders.

The information provided in the table below with respect to each selling
stockholder has been obtained from that selling stockholder. Except as
otherwise disclosed below, none of the selling stockholders has, or within the
past three years has had, any position, office or other material relationship
with us. Because the selling stockholders may sell all or some portion of the
shares of common stock beneficially owned by them, we cannot estimate the number
of shares of common stock that will be beneficially owned by the selling
stockholders after this offering. In addition, the selling stockholders may have
sold, transferred or otherwise disposed of, or may sell, transfer or otherwise
dispose of, at any time or from time to time since the date on which they
provided the information regarding the shares of common stock beneficially owned
by them, all or a portion of the shares of common stock beneficially owned by
them in transactions exempt from the registration requirements of the Securities
Act of 1933.

Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Commission under the Securities Exchange Act of 1934. Unless
otherwise noted, each person or group identified possesses sole voting and
investment power with respect to shares, subject to community property laws
where applicable. None of the share amounts set forth below represents more
than 1% of our outstanding stock as of June 27, 2000, adjusted as required by
rules promulgated by the SEC.

<TABLE>
<CAPTION>
Number of Shares Being Shares Held in
Selling Stockholder Shares Offered Escrow
---------------------------------------------------------- ---------------------- --------------- -------------------
<S> <C> <C> <C>
Moshe Shahaf 6 6 0
Orckit Communications Ltd. 28,202 28,202 3,206
Investec Clali Trust Company Ltd. (Ziv) 138 138 16
Investec Clali Trust Company Ltd. (Katz) 8 8 0
Howard Strachman 7,998 7,998 910
Jerusalem Pacific Ventures LP 27,374 27,374 3,112
Mofet Israel Technology Fund Ltd. 10,410 10,410 1,184
SVE Star Ventures Enterprises No. III GbR 10,074 10,074 1,146
SVE Star Ventures Enterprises No. IIIA 842 842 96
SVM Star Ventures Managementgesellschaft mbH Nr. 3 & Co. 4,432 4,432 504
Betielgungs KG
SVM Star Ventures Enterprises No. V 34,418 34,418 3,914
Star Management of Investments (1993) LP 6,056 6,056 688
Gilde IV Fund B.V. 18,478 18,478 2,102
One Liberty Fund III L.P. 112 112 12
Unicycle Trading Co. 2,230 2,230 254
Innovacom 2 7,436 7,436 846
Jerusalem Venture Partners L.P. 161,096 161,096 18,318
Jerusalem Venture Partners (Israel) L.P. 15,586 15,586 1,772
Gemini Israel II LP 50,988 50,988 5,798
Gemini Israel II Parallel Fund LP 40,004 40,004 4,548
Advent PGGM Gemini LP 6,500 6,500 740

</TABLE>

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<PAGE>

<TABLE>
<CAPTION>
Number of Shares Being Shares Held in
Selling Stockholder Shares Offered Escrow
---------------------------------------------------------- ---------------------- --------------- -------------------
<S> <C> <C> <C>
Gemini Partner Investors LP 818 818 94
Digital Media & Communications L.P. 5,206 5,206 592
Advent International Corporation 2,230 2,230 254
Investec Clali Trust Company Ltd. (as trustee for the 46,018 46,018
employees)
</TABLE>

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<PAGE>

<TABLE>
<S> <C>
We have not authorized any dealer, sales person or
other person to give any information or to make
any representations other than those contained in
this prospectus or any prospectus supplement. You
must not rely on any unauthorized information.
This prospectus is not an offer of these
securities in any state where an offer is not
permitted. The information in this prospectus is
current as of June 30, 2000. You should not 536,766 SHARES
assume that this prospectus is accurate as of any
other date. COMMON STOCK

PROSPECTUS

TERAYON COMMUNICATION SYSTEMS, INC.

June 30, 2000

</TABLE>

TABLE OF CONTENTS PAGE

Prospectus Summary............................... 1
Forward-Looking Statements....................... 1
Risk Factors..................................... 4
Use of Proceeds.................................. 18
Dividend Policy.................................. 18
Where You Can Find More Information.............. 18
Selling Stockholders............................. 19
Plan of Distribution............................. 21
Legal Matters.................................... 22
Experts.......................................... 22

<PAGE>

EXHIBIT INDEX

Exhibit Number Description of Document

5.1 Opinion of Cooley Godward LLP.

23.1 Consent of Ernst & Young, Independent Auditors.

23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.

23.3 Consent of Kost Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.

23.4 Consent of Kost Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.

23.5 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).

24.1 Power of Attorney. Reference is made to the signature page.