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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------
                                    Form 10-Q
                                ----------------

  [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                       OR

  [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934


        FOR THE TRANSITION PERIOD FROM _______________ TO _______________ .


                       COMMISSION FILE NUMBER: 000-24647
                                --------------

                      TERAYON COMMUNICATION SYSTEMS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                  DELAWARE                               77-0328533
       (STATE OR OTHER JURISDICTION OF                 (IRS EMPLOYER
        INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)

                             2952 BUNKER HILL LANE
                         SANTA CLARA, CALIFORNIA 95054
                                 (408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                                --------------

Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  [X] Yes     [ ] No

  The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 20,913,831 at August 9, 1999

 ===============================================================================
<PAGE>




SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements of Terayon
Communication Systems, Inc. within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 which are subject to the "safe harbor" created by those sections.
These forward-looking statements include, but are not limited to:
statements related to industry trends and future growth in the markets
for cable modem systems; industry standards activities; our strategies
for reducing the cost of our products; our product development efforts;
the effect of GAAP accounting pronouncements on our recognition of
revenues; our future research and development; the timing of our
introduction of new products; the timing and extent of deployment of our
products by our customers; and future profitability.  Discussions
containing such forward-looking statements may be found in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."  These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from
those in such forward-looking statements.  We disclaim any obligation to
update these forward-looking statements as a result of subsequent
events.  The business risks on pages 15 through 19, among other things,
should be considered in evaluating our prospects and future financial
performance


TERAYON COMMUNICATION SYSTEMS, INC.


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

        Condensed Consolidated Balance Sheets - June 30, 1999 and
        December 31, 1998

        Condensed Consolidated Statements of Operations - Three and Six Months
        Ended June 30, 1999 and 1998

         Condensed Consolidated Statements of Cash Flows -- Six Months
         Ended June 30, 1999 and 1998

Notes to Condensed Consolidated Financial Statements

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

PART II: OTHER INFORMATION
Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signature


PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                      TERAYON COMMUNICATION SYSTEMS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                       June 30,     December 31,
                                                        1999          1998
                                                     ------------  ------------
                                                            (unaudited)
<S>                                                  <C>           <C>
                               ASSETS
Current assets:
  Cash and cash equivalents........................      $27,939       $14,342
  Short-term investments...........................       78,154        14,538
  Accounts receivable, less allowance for doubtful
   accounts of $1,224 in 1999 and $594 in 1998.......      6,878         2,090
  Accounts receivable from related party...........        1,985         1,549
  Inventory........................................        5,618         3,950
  Other current assets.............................        3,245         1,856
                                                     ------------  ------------
Total current assets...............................      123,819        38,325
Property and equipment, net........................        4,109         3,593
Officer note receivable............................       --               100
Other assets.......................................          720           128
                                                     ------------  ------------
Total assets.......................................     $128,648       $42,146
                                                     ============  ============

           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.................................      $14,058        $8,600
  Accrued payroll and related expenses.............        2,757         2,475
  Other accrued liabilities........................        3,912         2,799
  Current portion of capital lease obligations.....            5            29
                                                     ------------  ------------
    Total current liabilities......................       20,732        13,903
Long-term portion of capital lease obligations.....            9            10
Deferred rent......................................          127           130

Commitments and contingencies

  Common stock, $.001 par value....................           21            16
  Additional paid-in capital.......................      214,475       114,594
  Accumulated deficit..............................     (104,841)      (84,301)
  Deferred compensation............................       (1,869)       (2,184)
  Stockholders' notes receivable...................           (6)          (22)
                                                     ------------  ------------
Total stockholders' equity.........................      107,780        28,103
                                                     ------------  ------------
Total liabilities and stockholders' equity.........     $128,648       $42,146
                                                     ============  ============
</TABLE>
                            See accompanying notes.
<PAGE>

                      TERAYON COMMUNICATION SYSTEMS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                           Three Months Ende    Six Months Ended
                                            June 30,             June 30,
                                       -------------------  --------------------
                                         1999      1998       1999      1998
                                       --------- ---------  --------- ----------
<S>                                    <C>       <C>        <C>       <C>
Revenues:
  Product revenues....................  $13,534    $2,202    $24,448     $4,279
  Related party product revenues......    5,548     4,730     10,507      5,097
                                       --------- ---------  --------- ----------
         Total revenues...............   19,082     6,932     34,955      9,376
                                       --------- ---------  --------- ----------
Cost of goods sold:
  Cost of product revenues............   11,410     1,453     22,018      5,017
  Cost of related party product
   revenues...........................    3,864     5,930      7,211      6,500
                                       --------- ---------  --------- ----------
         Total cost of goods sold.....   15,274     7,383     29,229     11,517
                                       --------- ---------  --------- ----------
Gross profit (loss)....................   3,808      (451)     5,726     (2,141)
                                       --------- ---------  --------- ----------
Operating expenses:
  Research and development............    3,951     2,618      7,106      4,923
  Cost of product development assistance
    agreement                            11,178      -        12,793      -
  Sales and marketing.................    3,016     1,829      5,852      2,969
  General and administrative..........    1,549       777      2,712      1,282
                                       --------- ---------  --------- ----------
         Total operating expenses.....   19,694     5,224     28,463      9,174
                                       --------- ---------  --------- ----------
Loss from operations..................  (15,886)   (5,675)   (22,737)   (11,315)
Net interest income (expense).........    1,239        32      2,197        (32)
                                       --------- ---------  --------- ----------
Net loss..............................  (14,647)   (5,643)   (20,540)   (11,347)
Series F convertible preferred
 stock dividend.......................      --    (23,910)       --     (23,910)
                                       --------- ---------  --------- ----------
Net loss applicable to common
 stockholders......................... ($14,647) ($29,553)  ($20,540)  ($35,257)
                                       ========= =========  ========= ==========
Historical basic and diluted net
 loss per share applicable to common
 stockholders.........................   ($0.71)   ($6.33)    ($1.06)    ($7.65)
                                       ========= =========  ========= ==========
Shares used in computing historical
 basic and diluted net loss per share
 applicable to common stockholders....   20,492     4,667     19,425      4,611
                                       ========= =========  ========= ==========
Pro forma basic and diluted net
 loss per share applicable to common
 stockholders.........................             ($2.36)               ($2.91)
                                                 =========            ==========
Shares used in computing pro forma
 basic and diluted net loss per share
 applicable to common stockholders....             12,529                12,132
                                                 =========            ==========
</TABLE>
                            See accompanying notes
<PAGE>

                      TERAYON COMMUNICATION SYSTEMS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                        Six Months Ended
                                                         June 30,
                                                    ----------------------
                                                       1999        1998
                                                    ----------  ----------
<S>                                                 <C>         <C>
Cash Used in Operating Activities                     ($7,130)    ($8,516)
                                                    ----------  ----------

Investing Activities:
 Purchase of short-term investments................  (148,972)         --
 Proceeds from sales and maturities of
   short-term investments..........................    85,356         418
 Purchase of property and equipment................    (1,547)       (727)
 Purchase of developed technology.................       (502)         --
                                                    ----------  ----------
 Net cash used in investing activities............    (65,665)       (309)
                                                    ----------  ----------

Financing Activities:
 Principal payments on capital leases..............       (25)        (42)
 Principal payments on long-term debt..............        --        (675)
 Exercise of options and warrant to purchase
   common stock...................................     10,809          56
 Proceeds from issuance of preferred stock.........        --       6,387
 Proceeds from issuance of redeemable
   preferred stock.................................        --       7,500
 Principal payments on common stockholder
   notes receivable ...............................        16          60
 Proceeds from issuance of common stock............    75,592          --
                                                    ----------  ----------
Net cash provided by financing activities..........    86,392      13,286
                                                    ----------  ----------
Net increase in cash and cash
  equivalents......................................    13,597       4,461
Cash and cash equivalents at beginning
  of period........................................    14,342       1,569
                                                    ----------  ----------
Cash and cash equivalents at end of period.........   $27,939      $6,030
                                                    ==========  ==========
</TABLE>
                            See accompanying notes
<PAGE>



1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial
statements at June 30, 1999 and for the three and six month periods ended
June 30, 1999 and 1998 have been included.

The unaudited condensed consolidated financial statements include the
accounts Terayon Communication Systems, Inc. (the "Company") and its
majority owned subsidiaries, Terayon Communication Systems Europe and
Terayon do Brasil.  The minority interest in net losses of Terayon
Communication Systems Europe and Terayon do Brasil were not significant for
all periods presented.  All material intercompany balances and transactions
have been eliminated.

Results for the three and six months ended June 30, 1999 are not
necessarily indicative of results for the entire fiscal year or future
periods. These financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes included in the
Company's Form 10-K dated March 23, 1999 as filed with the U.S. Securities
and Exchange Commission.  The accompanying balance sheet at December 31,
1998 is derived from audited financial statements at that date.

Cash Equivalents and Short-Term Investments

The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Investments with an original maturity at the time of purchase of over three
months are classified as short-term investments regardless of maturity date
as all instruments are classified as available-for-sale and can be readily
liquidated to meet current operational needs.  At June 30, 1999, all of the
Company's total cash equivalents and short-term investments were classified
as available-for-sale and were obligations issued by U.S. government
agencies and multinational corporations, maturing within two years.

Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market.
The components of inventory are as follows (in thousands):

<TABLE>
<CAPTION>
                                         June 30,     December 31,
                                          1999          1998
                                       ------------  ------------
<S>                                    <C>           <C>
  Finished goods....................        $4,497        $3,355
  Work-in-process...................           536           170
  Raw materials.....................           585           425
                                       ------------  ------------
                                            $5,618        $3,950
                                       ============  ============
</TABLE>


Net Loss Per Share Applicable to Common Stockholders

Historical basic and diluted net loss per share applicable to
common stockholders were computed using the weighted average number of
common shares outstanding. Options, warrants, restricted stock and
preferred stock were not included in the computation of diluted net
loss per share applicable to common stockholders because the effect
would be antidilutive.

Pro forma net loss per share applicable to common stockholders was
computed as described above and also gives effect, even if
antidilutive, to common equivalent shares from preferred stock that
automatically converted upon the closing of the Company's initial
public offering (using the as-if-converted method).

A reconciliation of shares used in the calculation of historical
and pro forma basic and diluted net loss per share applicable to
common stockholders follows (in thousands, except per share date):

<TABLE>
<CAPTION>

                                        Three Months End    Six Months Ended
                                         June 30,            June 30,
                                    ------------------- -------------------
                                      1999      1998      1999      1998
                                    --------- --------- --------- ---------
<S>                                 <C>       <C>       <C>       <C>
Net loss applicable to common
stockholders.....................   ($14,647) ($29,553) ($20,540) ($35,257)
                                    ========= ========= ========= =========
Shares used in computing
historical basic and diluted net
loss applicable to common
stockholders.....................     20,492     4,667    19,425     4,611
                                     ========  ========  ========  ========
Historical basic and diluted net
loss per share applicable to
common stockholders..............     ($0.71)   ($6.33)   ($1.06)   ($7.65)
                                     ========  ========  ========  ========
Shares used in computing
historical basic and diluted net
loss per share applicable to
common stockholders..............                4,667               4,611

Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
convertible preferred stock
outstanding to common stock.....                 7,862               7,521
                                              ---------           ---------
Shares used in computing pro
forma basic and diluted net loss
per share applicable to common
stockholders.....................               12,529              12,132
                                               ========            ========
Pro forma basic and diluted net
loss per share applicable to
common stockholders..............               ($2.36)             ($2.91)
                                              =========           =========

</TABLE>

Comprehensive Net Loss

The Company has adopted Statement of Accounting Standard No. 130
"Reporting Comprehensive Income" (FAS130). FAS 130 requires
that all items required to be recognized under accounting standards as
components of comprehensive income (comprehensive net loss) be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company's comprehensive
net loss was the same as its net loss for the three and six months
ended June 30, 1999 and 1998.

Segments of an Enterprise and Related Information

The Company operates in one business segment, the sale of cable
modem access systems, which it sells primarily to customers within the
cable and communications industries. The TeraPro and TeraLink are sold
together as part of an entire system, and the Company accordingly does
not report revenue derived from these components.

The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over
resource allocation decisions and performance assessment. The CODM
does not receive discrete financial information about the individual
components.

Impact of Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133).  FAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities.  FAS 133 was
effective for fiscal years beginning after June 15, 1999.  In July
1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the Effective Date of
FASB Statement No. 133" (FAS 137).  FAS 137 defers for one year the
effective date of FAS 133 which will now apply to all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company
believes that the adoption of  FAS 137 will not have a significant
impact on the Company's operating results or cash flows.

2. Stockholders' Equity

Public Offering

In January 1999, the Company completed a public offering of
3,250,000 shares of common stock, of which 1,750,000 shares were
offered by the Company and 1,500,000 shares were offered by existing
stockholders.  The public offering resulted in proceeds to the Company
of approximately $62,500,000, net of underwriting discounts,
commissions and other offering costs.  In February 1999, the
underwriters purchased 487,500 additional shares of common stock as a
result of the exercise of the over-allotment option, of which 351,946
and 135,554 shares of common stock were purchased from the Company and
certain existing stockholders, respectively.  This additional sale of
common stock resulted in proceeds of approximately $12,700,000 to the
Company, net of underwriting discounts and commissions.

Shaw Warrant Exercise

On March 11, 1999, Shaw Communications, Inc. ("Shaw") purchased
1,500,000 unregistered shares of the Company's common stock at $6.50
per share, resulting in net proceeds to the Company of approximately
$9,750,000.  The shares were purchased pursuant to the exercise of a
warrant to purchase 3,000,000 shares of the Company's common stock
issued to Shaw in 1998.

During 1998, the Company also issued a warrant (the "Anti-Dilution
Warrant") to Shaw to purchase an indeterminate number of shares of the
Company's common stock. The Anti-Dilution Warrant is exercisable at
the option of Shaw during the period that Shaw owns equity securities
of the Company (purchased in April 1998) and in the event the Company
issues new equity securities at below the current market price as
defined in the Anti-Dilution Warrant. The aggregate exercise price is
$1.00.  Should the Company be required to issue to Shaw certain
additional shares of its common stock under the Anti-Dilution Warrant,
future material charges may arise that would adversely affect the
Company's results of operations. The Company recorded expenses of
approximately $300,000 for the three and six months ended June 30,
1999 relating to shares issuable pursuant to the Anti-Dilution Warrant
(none during the three and six month period ended June 30, 1998).

3.  Product Development Assistance Agreement

On March 18, 1999, the Company entered into a one-year Product
Development Assistance Agreement ("Development Agreement") with Rogers
Communications Inc. ("Rogers Communications"). Under the terms of the
Development Agreement, Rogers Communications will provide the Company
assistance with the characterization and testing of the Company's
subscriber-end and head-end voice-over-cable equipment.  In addition,
Rogers Communications will provide the Company with technology to
assist the Company in connection with its efforts to develop high
quality, field proven technology solutions that are DOCSIS (1.0, 1.1
and 1.2)-compliant and packet cable-compliant. In consideration of
Rogers Communications entering into the Development Agreement, the
Company issued Rogers Communications two fully vested and non-
forfeitable warrants, each to purchase 1,000,000 shares of common
stock.  One warrant provides for an exercise price of $1.00 per share
and one warrant provides for an exercise price of $37.00 per share.
The warrants may be exercised at any time in full or in part through
June 30, 2000.  The fair value of the two warrants is estimated to be
approximately $45,000,000 and will result in a noncash charge included
in operations over the one-year term of the Development Agreement.
For the three and six months ended June 30, 1999, the Company incurred
approximately $11,200,000 and $12,800,000, respectively, of product
development expense related to the Development Agreement.

In addition, on March 18, 1999, the Company entered into a Supply
Agreement with Rogers Cablevision Limited ("Rogers Cablevision"), a
subsidiary of Rogers Communications.  Under the Supply Agreement, the
Company agreed to make available to Rogers Cablevision its current
TeraLink Gateway and TeraLink 1000 Master Controller, and TeraPro
Cable Modems and specified software. The Company also committed to
certain product pricing and specifications.

The Supply Agreement and the Development Agreement do not
constitute a commitment by either Rogers Cablevision or Rogers
Communications to purchase or deploy any particular volume or quantity
of the Company's product.  No such commitment will be made unless
Rogers Cablevision or Rogers Communications issues a purchase order to
the Company.

4.  Contingencies

In the normal course of business, the Company from time to time
receives inquiries with regard to various legal proceedings. In the
opinion of management, any liability resulting from these inquiries
has been accrued and will not have a material adverse effect on the
Company's financial position or results of operations.

5.  Subsequent Event

In July 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") to acquire Imedia Corporation
("Imedia"), a California corporation. Imedia produces routing and re-
multiplexing systems for digital video that enable cable operators to
select and customize their program lineup for viewer preferences,
while maximizing video capacity and quality over standards-based set-
top boxes. In general, the Imedia shareholders, vested optionholders
and warrantholders will receive shares of Terayon common stock,
options and warrants to purchase shares of Terayon common stock and,
in certain circumstances, cash, valued at up to approximately
$99,000,000 and not less than approximately $69,000,000, subject to
adjustment.  The holders of unvested Imedia options also will receive
options to purchase Terayon common stock, the fair value of which will
be included in the purchase price. The maximum total purchase price is
estimated to be approximately $107,000,000.  The shares of Terayon
common stock, options and warrants to purchase shares of Terayon
common stock and, if applicable, cash payments will be delivered at up
to three different closings over the 18-month period following the
effective date of the transaction. The transaction is subject to
customary closing conditions, including approval by Imedia's
shareholders, and is expected to close late in the third quarter of
1999.  The Company expects to account for the acquisition as a
purchase transaction.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS  OF OPERATIONS

 Overview

We develop, market and sell broadband access systems based upon our S-
CDMA technology.  Our objective is to be the leading provider of broadband
access systems to cable operators seeking to provide broadband access
services to residential and commercial end users.  Since our inception in
January 1993, we have focused on the development of our S-CDMA technology,
as well as certain other core technologies, to enable broadband transmission
of data over cable networks. We began the specification and design of our
first ASIC in October 1994 and produced the first version of this ASIC in
June 1996. At the same time, we developed an end-to-end broadband access
system, the TeraComm system, around the ASIC. During late 1996 and through
1997, we began limited field trials of the TeraComm system with several
cable operators. We commenced volume shipments to a small number of cable
operators in the first quarter of 1998. We had revenues of  $19.1 million
for the three months ended June 30, 1999 and $35.0 million for the six
months ended June 30, 1999.  This compares to revenues of $6.9 million for
the three months ended June 30, 1998 and $9.4 million for the six months
ended June 30, 1998.

We sell our products both in the United States and internationally, and
we market our products primarily to cable operators and distributors. Our
strategy is to supply leading cable operators worldwide.  Consistent with
this strategy, our initial target market consists of the ten largest cable
companies in each major geographic area.  In most markets, a small number of
large cable operators often provide services to a majority of the
subscribers in a specific region and thus influence the purchase decisions
of smaller cable operators.  To date, four of the largest North American
cable operators, Rogers Cablevision, Shaw Communications Inc., Cablevision
Systems, Inc. and TCA Cable TC, Inc., are deploying the TeraComm system. In
Japan, through our partner Sumitomo Corporation, we have established
ourselves as the market leader.  In Europe, we have a contract to ship
225,000 modems to United Pan-Europe Communications ("UPC"), Europe's largest
cable operator.  As a result of the nature of the cable industry and our
strategic focus, a small number of customers have accounted for all of our
revenues to date, and we expect that the majority of our revenues will
continue to be generated from a small number of customers for the
foreseeable future. In the three months ended June 30, 1999, sales to Shaw
represented approximately 29% of our revenues and sales to Sumitomo
represented approximately 17% of our revenues.  This compares to
approximately 41% of revenues from Shaw and approximately 14% of revenues
from each of  Sumitomo and Cablevision in the three months ended June 30,
1998.  In the six months ended June 30, 1999, sales to Shaw represented
approximately 30% of revenues, sales to Sumitomo represented approximately
16% of revenues and sales to Cablevision represented approximately 12% of
revenues.  This compares to 40% of revenues from sales to Shaw, 14% of
revenues from sales to Sumitomo and 10% of revenues from sales to
Cablevision in the six months ended June 30, 1998.

The market for broadband access products and services  is characterized
by rapid technological change, new product development and product
obsolescence and evolving industry standards. A significant element of our
strategy is to advance industry standards and to extend our technology
leadership and achieve rapid time to market.  In November 1998, we were
selected by CableLabs to co-author DOCSIS 1.2, an enhanced version of the
DOSCIS cable modem specification based in part on our S-CDMA technology.  In
order to advance the standardization of cable modem technology, we have
agreed to contribute some aspects of our S-CDMA technology to the DOCSIS
intellectual property pool upon completion and acceptance of a specification
that includes our S-CDMA technology.  We intend to develop future products
that are DOCSIS 1.2-compliant and are actively participating in the
development of additional industry standards.

The intensely competitive nature of the market for broadband access
systems has resulted in significant price erosion over time.  We have
experienced and expect to continue to experience downward pressure on our
unit average selling price ("ASP"). We had negative gross margins from
inception until the fourth quarter of 1998 when we achieved a positive gross
margin for the first time. A key component of our strategy is to decrease
the cost of manufacturing our products to improve our gross margins.  For
example, in the fourth quarter of 1998, we introduced a cable modem using a
single-board design, which has higher gross margins than our original dual
board design.  We intend to continue to engage in and implement cost
reduction efforts, including the further integration of ASIC components,
other design changes and the introduction of a second contract manufacturer.

We sustained net losses applicable to common stockholders of  $14.6
million for the three months ended June 30, 1999 and $29.6  million for the
same period of 1998. For the six months ended June 30, 1999, we sustained
net losses applicable to common stockholders of $20.5 million compared to
$35.3 million for the same period of 1998. As a result, we had an
accumulated deficit of $104.8 million as of June 30, 1999. Our operating
expenses are based in part on our expectations of future sales, and we
expect that a significant portion of our expenses will be committed in
advance of sales. We expect to increase significantly our expenditures in
technical development and sales and marketing as we engage in activities
related to product enhancement, cost reduction and increasing market
penetration. Additionally, we expect to increase our capital expenditures
and other operating expenses in order to support and expand our operations.
We anticipate that we will spend approximately $4.0 million on capital
expenditures and approximately $22.3 million on research and development
during the 12 months ended June 30, 2000. Anticipated capital expenditures
consist of purchases of additional test equipment to support higher levels
of production and computer hardware, software and equipment for newly hired
employees. As a result of these anticipated increased operating expenses, we
expect to continue to incur losses for the foreseeable future.

Recent Developments

In July 1999, we entered into an Agreement and Plan of Reorganization
(the "Agreement") to acquire Imedia Corporation ("Imedia"), a California
corporation. Imedia produces routing and re-multiplexing systems for digital
video that enable cable operators to select and customize their program
lineup for viewer preferences, while maximizing video capacity and quality
over standards-based set-top boxes. In general, the Imedia shareholders,
vested optionholders and warrantholders will receive shares of our common
stock, options and warrants to purchase shares of our common stock and, in
certain circumstances, cash, valued at up to approximately $99.0 million and
not less than approximately $69.0 million, subject to adjustment.  The
holders of unvested Imedia options also will receive options to purchase our
common stock, the fair value of which will be included in the purchase
price. The maximum total purchase price is estimated to be approximately
$107.0 million.  The shares of our common stock, options and warrants to
purchase shares of our common stock and, if applicable, cash payments will
be delivered at up to three different closings over the 18-month period
following the effective date of the transaction. The transaction is subject
to customary closing conditions, including approval by Imedia's
shareholders, and is expected to close late in the third quarter of 1999. We
expect to account for the acquisition as a purchase transaction.

Results of Operations

Three and Six Months Ended June 30, 1999 and 1998

        Revenues.  Revenues consist primarily of sales of cable modems and
headend equipment to new and existing customers. We generally recognize
revenues upon shipment of products to customers.  Our revenues increased to
$19.1 million for the three months ended June 30, 1999 from $6.9 million for
the same period in 1998.  For the six months ended June 30, 1999 our
revenues increased to $35.0 million from $9.4 million for the same period in
1998.  Our revenues increased during the three and six months ended June 30,
1999 compared to the same periods in 1998, due to shipments made to new
customers, such as UPC, as well as increased shipments to existing
customers, such as Shaw and Sumitomo. Our components are sold together as
part of an entire system and, accordingly, we do not report revenues derived
from each component.

        Cost of Goods Sold. Cost of goods sold consists of direct product costs
and the cost of our manufacturing operations group.  The cost of our
manufacturing operations group consists of assembly, test and quality
assurance for products, warranty costs and associated costs of personnel and
equipment. For the three months ended June 30, 1999, we incurred cost of
goods sold of $15.3 million compared to $7.4 million for the three months
ended June 30, 1998. We incurred cost of goods sold of $29.2 million for the
six months ended June 30, 1999 compared to $11.5 million for the same period
in 1998. Our cost of goods sold increased during the three and six months
ended June 30, 1999 compared to the same periods in 1998 primarily due to
increased product shipments.  Cost of goods sold for the six months ended
June 30, 1998 included a charge of $1.3 million relating to the write-off of
obsolete inventory and the transition of manufacturing operations to
Solectron during the first quarter of 1998.

        Gross Profit (Loss).  We achieved a gross profit of $3.8 million for the
three months ended June 30, 1999 compared to a gross loss of $451,000 for
the same period in 1998.  Gross profit for the six months ended June 30,
1999 was $5.7 million compared to a gross loss of $2.1 million for the six
month period ended June 30, 1998. The gross profit for the three months
ended June 30, 1999 represents the third consecutive quarter we have
achieved positive margins. This improvement in our gross margin is largely
the result of the introduction of our lower cost, single-board modem and our
continued cost reduction efforts.    We are continuing to pursue further
cost reductions in our products. We also expect continued decreases in the
average sales price of our modem.  It is anticipated that these price
decreases could offset, at least partially, any further cost reductions that
we may be able to achieve.

Our gross profit also is influenced by the sales mix of TeraLink Master
Controllers, TeraLink Gateways and TeraPro cable modems and the maturity of
TeraComm system deployments in any quarter.  TeraPro cable modems have lower
margins than the TeraLink Master Controllers and TeraLink Gateway headend
products. New deployments of TeraComm systems typically include a higher mix
of headend equipment and involve smaller quantities of product sold.
Products sold in connection with new deployments thus generally are sold at
higher margins than products associated with more mature deployments of the
TeraComm system, which generally involve larger quantities of products. We
expect that the introduction of new customers and the relationship of
revenues generated from the sale of TeraPro cable modems to our overall
revenue will result in fluctuations in our gross profit in future quarters.

        Research and Development. Research and development expenses consist
primarily of personnel costs, as well as design expenditures, equipment and
supplies required to develop and enhance our products. Research and
development expenses increased to $4.0 million for the three months ended
June 30, 1999 from $2.6 million for the three months ended June 30, 1998,
primarily due to increased personnel. For the six months ended June 30,
1999, research and development expenses were $7.1 million compared to $4.9
million for the same period in 1998, also primarily due to increased
personnel.  We intend to increase investment in research and development
programs in future periods for the purpose of enhancing current products,
reducing the cost of current products and developing new products.

        Cost of Product Development Assistance Agreement.  In March 1999, we
entered into a one-year Product Development Assistance Agreement with Rogers
Communications Inc. Under the terms of the Development Agreement, Rogers
will assist us with the characterization and testing of our subscriber-end
and head-end voice-over-cable equipment.  In addition, Rogers will provide
us with technology to assist us with our efforts to develop high quality,
field proven technology solutions that are DOCSIS-compliant and packet
cable-compliant.  The Development Agreement has a term of one year.  In
consideration of Rogers entering into the Development Agreement, we issued
Rogers two fully vested and non-forfeitable warrants, each to purchase
1,000,000 shares of common stock.  One warrant has an exercise price of
$1.00 per share and one warrant has an exercise price of $37.00 per share.
The warrants may be exercised at any time in full or in part through June
30, 2000.  The fair value of the two warrants is estimated to be
approximately $45,000,000 and will result in a noncash charge included in
operations over the one-year term of the Development Agreement.   As a
result of the Development Agreement, our results for the three months ended
June 30, 1999 include a noncash charge of  $11.2 million and our results for
the six months ended June 30, 1999 include a noncash charge of $12.8
million.

        Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales, marketing and customer service and
support personnel and costs related to trade shows, consulting and travel.
Sales and marketing expenses increased to $3.0 million for the three months
ended June 30, 1999 from $1.8 million for the three months ended June 30,
1998. For the six months ended June 30, 1999, sales and marketing expenses
increased to $5.9 million from $3.0 million for the same period in 1998. The
increase in sales and marketing expenses was primarily due to increased
payroll and commission costs related to additional sales and support
personnel required to support higher sales in 1999. We expect sales and
marketing expenses to increase in the future as we expand our sales,
marketing and customer support capabilities through increases in both our
direct sales staff and our marketing staff, as well as increased
relationships with distributors.

        General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General
and administrative expenses increased to $1.5 million for the three months
ended June 30, 1999 from $777,000 for the three months ended June 30, 1998.
General and administrative expenses increased to $2.7 million for the six
months ended June 30, 1999 from $1.3 million for the six months ended June
30, 1998. The increase was primarily a result of the additional reporting
requirements imposed on us as a public company and the increased
infrastructure required to support our expanded activities.   We expect that
general and administrative expenses will continue to increase in the near
term as a result of these factors.

        Series F Convertible Preferred Stock Dividend. We recorded a dividend of
$23.9 million in the six months ended June 30, 1998. The dividend
represented the fair value of a warrant to purchase 3,000,000 shares of our
common stock (the "Shaw Warrant"), and was recorded under the provision of
the Financial Accounting Standards Board's Emerging Issues Task Force Issue
No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Shaw Warrant was issued
in connection with the sale of $5.0 million of convertible preferred stock
to Shaw (the "Shaw Financing"). Our accounting conclusion was that the sale
of preferred stock was, in substance, a financing transaction and not the
issuance of equity instruments in exchange for goods or services. When we
issued the $5.0 million of convertible preferred stock and the Shaw Warrant
on April 6, 1998, our singular objective was to obtain sufficient liquidity
to continue as a going concern. At the time of the Shaw Financing, our
ability to continue as a going concern was in serious doubt. At March 31,
1998, we had only $109,000 in cash, but were using cash of approximately
$1.0 million, net, per month in operations.  In addition, we had a deficit
in working capital of $8.8 million.  On March 11, 1999, Shaw purchased
1,500,000 shares of our common stock under the terms of the above warrant,
resulting in net proceeds to us of $9.8 million.

        Net Interest Income (Expense). Net interest income was $1.2 million for
the three months ended June 30, 1999 compared to $32,000 for the three
months ended June 30, 1998. Net interest income was $2.2 million for the six
months ended June 30, 1999 compared to net interest expense of $32,000 for
the same period in 1998. The increases were due to higher cash balances
resulting from the proceeds of our initial public offering in August 1998
and our subsequent follow-on public offering in January 1999.

        Income Taxes.  We have not generated net income to date and therefore we
have not incurred or accrued any income taxes since our inception.

Liquidity and Capital Resources

At June 30, 1999, we had approximately $27.9 million in cash and cash
equivalents, $78.2 million in short-term investments and a $10.0 million
revolving line of credit. There were no outstanding borrowings under the
line of credit and approximately $3.0 million was available.

On January 21, 1999, we completed a public offering of 3,250,000 shares
of common stock at a public offering price of $38.00 per share. Of the
3,250,000 shares, we sold 1,750,000 shares and selling stockholders sold
1,500,000 shares. We received net proceeds of $62.5 million, after the
underwriting discount of approximately $3.3 million and offering expenses of
approximately $700,000. The proceeds from this offering have been designated
for general corporate purposes. On February 9, 1999, the underwriters
exercised their option to purchase 487,500 additional shares of common stock
to cover over-allotments, of which 351,946 shares were purchased from us and
135,554 shares were purchased from selling stockholders.  Our net proceeds
from the exercise of the over-allotment option were $12.7 million.

On March 11, 1999, Shaw purchased 1,500,000 unregistered shares of our
common stock at $6.50 per share, resulting in net proceeds to us of $9.8
million.  The shares were purchased pursuant to the exercise of a warrant to
purchase 3,000,000 shares of our common stock issued to Shaw in 1998.

        Cash used in operating activities in the first six months of 1999 was
$7.1 million compared to $8.5 million in the first six months of 1998. Cash
used in investing activities was $65.7 million in the first six months of
1999 compared to $309,000 in the first six months of 1998.  Investment
activities consisted primarily of the purchase of short-term investments in
1999 and the purchase of property and equipment in 1998.  Cash provided by
financing activities was $86.4 million for the six months ended June 30,
1999 compared to $13.3 million for the six months ended June 30, 1998.
Financing activities consisted primarily of proceeds from the issuance of
common stock in 1999 and from the issuance of preferred stock in 1998.

        As of June 30, 1999, we had approximately $24.8 million of unconditional
purchase obligations. We anticipate that we will pay approximately $13.6
million of these obligations by September 30, 1999. We intend to make these
payments out of available working capital.

We believe that our current cash balances will be sufficient to satisfy
our cash requirements for at least the next 12 months.

Year 2000

The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year (the "Year 2000
Issue"). Computer programs that have date-sensitive software like this may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

  We are heavily dependent upon the proper functioning of our own
computer or data-dependent systems. This includes, but is not limited to,
our systems in information, business, finance, operations, manufacturing and
service. Any failure or malfunctioning on the part of these or other systems
could harm us in ways that are not currently known, discernible,
quantifiable or otherwise anticipated.

  We have established an internal task force to evaluate those areas of
our business that may be affected by the Year 2000 Issue.  The task force
has developed a plan for timely Year 2000 compliance (the "Plan"). The Plan
consists of four identifiable activities.

* Inventory and Assessment.  This activity involves identifying and
compliance classifying products and internal systems and assessing the
potential impact to critical business processes and business continuity in
the event the products and systems are non-compliant. In addition, this
activity includes formal communication with significant suppliers, large
customers and development partners to determine the extent to which we are
vulnerable to these third parties' failures to remedy their own Year 2000
issues.

* Testing and Remediation. This activity involves testing our products
and internal systems and upgrading and replacement of non-compliant products
and systems.

* Contingency Planning. This activity involves the development of
contingency plans for situations that may result if we are unable to achieve
Year 2000 readiness of our critical operations.

* Internal Audit. This activity involves assuring complete and continued
compliance of our products and systems.

 The Plan has been implemented but has not been completed.  We have
developed and conducted tests to determine whether our products are Year
2000 compliant.  All TeraComm System hardware and software passed the
compliance tests.  Based on these results, we believe our products are Year
2000 compliant and we will continue to test our products to ensure
continuing compliance.   Inventory and assessment of our internal systems in
finance, operations, manufacturing and service is continuing.  In some
instances, we have received assurances from software vendors that Year 2000
compliance can be achieved in these areas through standard, planned upgrades
of system software. Many of these upgrades already have been completed. We
anticipate that we will address the critical Year 2000 issues by the end of
the third quarter of 1999, prior to any anticipated impacts on our operating
systems.  We expect that we may address some non-critical Year 2000 issues
beyond the Year 2000.

   We also are in the process of attempting to determine whether our key
suppliers and customers are Year 2000 compliant.  To date, we have only
limited information on the Year 2000 compliance of these suppliers and
customers. The operations of our key suppliers and customers could be harmed
in the event they do not successfully and timely achieve Year 2000
compliance. Our business and results of operations could suffer if our key
suppliers were to experience Year 2000 issues that caused them to delay
manufacturing or shipment of key components to us. In addition, our results
of operations may be harmed if any of our key customers encounter Year 2000
issues that cause them to delay or cancel substantial purchase orders or
delivery of our product.

 To date, we have not incurred significant costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. Furthermore, we believe
that future costs associated with our Year 2000 compliance efforts will not
be material.

   We may not be able to address the Year 2000 Issue in a timely manner or
to upgrade any or all of our major systems in accordance with the plan. In
addition, any upgrades we do may not effectively address the Year 2000
Issue. If required upgrades are not completed timely or are not successful,
we may be unable to conduct our business or manufacture our products.
Furthermore, there can be no guarantee that the systems of other companies
on which our systems rely will be timely converted. In addition, a failure
to convert by another company, or a conversion that is incompatible with our
systems, would harm our business. We intend to, but have not yet established
a contingency plan detailing actions that will be taken in the event that
the assessment of the Year 2000 Issue is not successfully completed on a
timely basis.

 Recent Financial Accounting Pronouncement

 In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. FAS 133 was
effective for fiscal years beginning after June 15, 1999. In July
1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the Effective Date of
FASB Statement No. 133" (FAS 137).  FAS 137 defers for one year the
effective date of FAS 133 which will now apply to all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company
believes that the adoption of  FAS 137 will not have a significant
impact on the Company's operating results or cash flows.

 CERTAIN BUSINESS RISKS

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

         We have a very limited operating history, and it is difficult to
predict our future operating results. We were incorporated in January 1993
and began shipping products commercially in June 1997. We have only been
shipping products in volume since the first quarter of 1998. As of June 30,
1999, we had an accumulated deficit of $104.8 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 increase expense
levels in each of the next several quarters to support increased sales and
marketing activities 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 growth in revenues 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 forecast by our customers;

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

* variations in capital spending budgets of cable operators; 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 cable
operators 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.

   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 the 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 Are Dependent on a Small Number of Customers.

         Three customers accounted for approximately 58% of our revenues in the
first six months of 1999 and for approximately 64% of our revenues in the
first six months of 1998. 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 the United States 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. 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, on 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.

 Our Acquisition of Imedia Could Result in Dilution, Operating Difficulties
and Other Harmful Consequences

        If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are
strategic.  In July 1999, we signed an agreement to acquire Imedia
Corporation.  The process of integrating an acquired business into our
business and operations may result in unforeseen operating difficulties and
expenditures. Integrating Imedia, or any other business, will require
significant management resources that would otherwise be available for the
ongoing development of our business. Moreover, the anticipated benefits of
any acquisition, including Imedia, may not be realized.  Future acquisitions
could result in us issuing potentially dilutive equity securities, incurring
debt, contingent liabilities or amortization expenses related to goodwill
and other intangible assets, any of which could harm our business.  Future
acquisitions may 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 Co-Authoring the
DOCSIS 1.2 Specification.

         In November 1998, CableLabs selected us to co-author a technical
specification for DOCSIS 1.2, an enhanced version of the DOCSIS cable modem
standard based in part on our S-CDMA technology. Our agreement to co-author
the DOCSIS 1.2 specification will require us to contribute some aspects of
our S-CDMA technology to a royalty-free intellectual property pool. As a
result, any of our competitors who join the DOCSIS intellectual property
pool will have access to some aspects of our technology and will not be
required to pay us any royalties or other compensation. Further, some of our
competitors have been successful in reverse engineering the technology of
other companies, and our contribution to the DOCSIS 1.2 intellectual
property pool would expose some aspects of our technology to those
competitors. 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.

         CableLabs may select additional authors to contribute to the DOCSIS 1.2
proposal. Any vendors that participate in the drafting process, including
us, must contribute any of their technology that is essential to implement
the DOCSIS 1.2 specification to the DOCSIS intellectual property pool on a
royalty-free basis. If the DOCSIS Certification Board includes our proposal
in the DOCSIS 1.2 draft specification, it will then be made available for
comment by the organizations that participate in the DOCSIS specification
process. The DOCSIS Certification Board may decide not to proceed with our
proposal. Further, the comment process may take considerably longer than
expected and may delay the publication of a DOCSIS 1.2 standard, currently
anticipated to occur in 2000. If our draft proposal is not approved by the
DOCSIS Certification Board, we may be unable to develop DOCSIS 1.2-compliant
cable modems in a timely fashion or at all.

         We believe the adoption of DOCSIS 1.2 will result in increased
competition in the North American cable modem market. This competition could
come from existing competitors or from new competitors who enter the market
as a result of the adoption of DOCSIS 1.2. This increased competition is
likely to result in lower ASPs of cable modem systems and likely will harm
our gross margin. Because our competitors will be able to incorporate some
aspects of our technology into their products, our current customers may
choose alternate cable modem suppliers or choose to purchase DOCSIS 1.2-
compliant cable modems from multiple suppliers. We may be unable to produce
DOCSIS 1.2-compliant cable modems more quickly or at lower cost than our
competitors. The inclusion of our S-CDMA technology in DOCSIS 1.2 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. If
standards that are not compatible with DOCSIS standards ultimately achieve
widespread acceptance outside of the United States and Canada, we could be
required to redesign our products for use in those markets. Even if we were
able to successfully redesign our products, this would likely delay the
deployment of our products in markets outside of the United States and
Canada.

 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 must also respond
to competitive pressures, evolving industry standards and technological
advances. Our current products are not DOCSIS-compliant, and we do not
expect to sell our DOCSIS 1.2-compliant products until 2000. As 2000
approaches, existing or potential customers may delay purchases of our
current cable modem system in order to purchase systems that comply with the
DOCSIS 1.2 standard. In addition, potential new customers could decide to
purchase DOCSIS 1.2-compliant products from one or more of our competitors
rather than from us. As a result, in the second half of 1999 and early 2000,
our product sales may be lower than we anticipate. As 2000 approaches, we
may be required to reduce the price of our current products for sales to
existing customers. This would harm our operating results and gross margin.

         It is expected that the DOCSIS 1.2 specifications will be based upon
both S-CDMA and advanced TDMA technology. In that event, we will have to
incorporate advanced TDMA technology into our DOCSIS 1.2-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.

 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 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 revenues 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 functionality 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 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 that agreement.

 We Face Many Other Risks.

       Also inherent in our business are additional risks, which include but are
not limited to the following:

* acceptance of cable modems by cable operators and end users of
broadband access services;

* our ability to develop additional distribution channels;

* our ability to convince cable operators to accept our technologies,
purchase our products and effectively market our product to end users;

* the magnitude and timing of capital spending by cable operators for
implementation of access systems for data transmission over cable
networks;

* future customer agreements that may contain price protection
provisions and certain return rights.

* our limited experience manufacturing our products and our dependence
on the manufacturing capabilities of our contract manufacturers to
assemble and test our products;

* our dependence on key suppliers;

* our ability to develop products that utilize new semiconductor process
technologies;

* the risks associated with our international business activities, which
account for a substantial portion of our total revenues;

* the highly competitive nature of the market for broadband access
systems and the existence of many established competitors;

* our dependence on the Internet and the development of the Internet
infrastructure;

* our ability to manage growth;

* the sufficiency of cash resources and our ability to obtain additional
financing on favorable terms, if at all, if required;

* our dependence on key personnel;

* the risks of product returns, product liability and product defects;

* our ability to adequately protect or enforce our intellectual property
rights; and,

* communications industry and other regulatory approvals.


PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     (d) Use of Proceeds from Sales of Registered Securities. We commenced our
initial public offering on August 18, 1998 pursuant to a Registration
Statement on Form S-1 (the "Registration Statement") (File No. 333-56911).
The managing underwriters of the public offering were BT Alex. Brown (now
known as Deutsche Banc Alex. Brown), Hambrecht & Quist, Lehman Brothers and
Salomon Smith Barney. In the offering, we sold an aggregate of 3,000,000
shares of our common stock for an initial price of $13.00 per share.

The aggregate proceeds from the offering were $39.0 million.  We paid
expenses of approximately $3.9 million, of which approximately $2.7 million
represented underwriting discounts and commissions and approximately $1.2
million represented expenses related to the offering. Net proceeds from the
offering were $35.1 million. Of the net proceeds, as of June 30, 1999,
approximately $12.4 million had been used to fund operating activities, $1.5
million had been used for payments on long-term debt and capital lease
obligations, $2.5 million had been used to purchase property and equipment
and $500,000 had been used to purchase other assets. The use of the proceeds
from the offering does not represent a material change in the use of
proceeds described in our Registration Statement. At June 30, 1999, the
remainder of the net proceeds were invested in short-term, interest-bearing,
investment grade securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

Our annual meeting of stockholders occurred on May 12, 1999.  At the
meeting, our stockholders approved the reelection of two directors, approved
an amendment to the Company's Restated Certificate of Incorporation to
increase the authorized number of shares from 30,000,000 to 45,000,000 and
ratified the selection of Ernst &Young LLP as our independent auditors for
the 1999 fiscal year.

Our stockholders voted as follows with respect to each of the above
matters:

<TABLE>
<CAPTION>
<S>                                   <C>        <C>      <C>      <C>
Proposal                                    Number of Shares Voted
                                      In favor   Against  Abstain  Broker
                                                                   Nonvotes

Lewis Solomon, nominee for director   17,327,556   18,661    --       --

Mark Stevens, nominee for director    17,328,044   18,173    --       --

Amendment to Restated Certificate
of Incorporation                      17,300,352   40,982    4,883    --

Selection of Ernst & Young LLP        17,335,071    8,367    2,779    --

</TABLE>

ITEM 5. OTHER INFORMATION

     None


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits


<TABLE>
<CAPTION>
<S>      <C>
Exhibit
Number   Description of Document

10.24    Amendment No. 1 to Lease dated April 8, 1999 between the
         Company and John Arrillaga Survivor's Trust and Richard
         T. Peery Separate Property Trust

10.25    Lease Agreement dated April 8, 1999 between John Arrillaga
         Survivor's Trust and Richard T. Peery Separate Property
         Trust.

27.1     Financial Data Schedule

</TABLE>

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


TERAYON COMMUNICATION SYSTEMS, INC.



By: /s/ RAY M. FRITZ                    Date: August 13, 1999
 ------------------------------------
 Ray M. Fritz
 Chief Financial Officer
         (Principal Accounting and Financial Officer)

<PAGE>