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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K/A

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OF 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)

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                         NAME OF EACH EXCHANGE
           TITLE OF EACH CLASS                            ON WHICH REGISTERED
           -------------------                           ---------------------
                   NONE                                           NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                     COMMON STOCK, par value $0.001 per share
                                (TITLE OF CLASS)


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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
March 24, 2000 as reported on the Nasdaq National Market, was approximately
$4,571,171,656. Shares of Common Stock held by each officer and director and by
each person known to the Company who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

     As of March 24, 2000, registrant had outstanding 28,972,171 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Shareholders to
be filed by April 28, 2000.Report on Form 8-K dated December 27, 1999.

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

The  Registrant hereby amends Item 3 contained in the Registrant's Report on
Form 10-K for the year ended December 31, 1999 to include certain information
on events subsequent to March 30, 1999.

The Registrant hereby amends Item 8 contained in the Registrant's Report on
Form 10-K for the year ended December 31, 1999 to amend certain information
contained in Notes 11 and 13 of the Notes to Consolidated Financial Statements.

The Registrant hereby amends Item 10, Item 11, Item 12 and Item 13 contained
in the Registrant's Report on Form 10-K for the year ended December 31, 1999 to
include the information required by these Items.

Except for such changes,  no other changes are made to the Registrant's Report
of Form 10-K for the year ended December 31, 1999.



ITEM 3. LEGAL PROCEEDINGS

        In September 1999, Imedia Corporation, now our subsidiary, was named
as a defendant in Evergreen Canada Israel Management Ltd. v.
Imedia Corporation, a case filed in San Francisco Superior Court
alleging that Imedia breached its term sheet agreement
with the Plaintiffs by negotiating with us while a no shop
provision was in place and refusing to allowing the Plaintiffs to invest
in Imedia.  The Plaintiffs are seeking damages in excess of $12.0
million.  As part of the terms of the Imedia Agreement and Plan of
Merger and Reorganization, shares of our common stock to be issued to
the former shareholders of Imedia were placed in escrow to indemnify us
for any damages that are directly or indirectly suffered as a result of any
claim brought by any Person who was a prospective investor in Imedia and
was not a securityholder of Imedia on the closing date of the Imedia
acquisition.  The value of the escrowed shares was approximately $10.0
million based on the market value of our common stock on the closing
date.  The case is in its initial stages, and no trial date has been
established.  We have reviewed the allegations made by the Plaintiffs
and we do not believe that the outcome will have a negative impact on
our financial position, results of operations or cash flows.

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 shareholders 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.


<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TERAYON COMMUNICATION SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


   Report of Ernst & Young LLP, Independent Auditors...................

   Consolidated Balance Sheets........................................


   Consolidated Statements of Operations...............................

   Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)

   Consolidated Statements of Cash Flows.................................

   Notes to Consolidated Financial Statements...........................



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Terayon Communication Systems, Inc.

                We have audited the accompanying consolidated balance sheets of
Terayon Communication Systems, Inc. as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders'
equity (net capital deficiency), and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.

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

        In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Terayon Communication Systems, Inc. at December
31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in
the United States.

                                                 /s/ Ernst & Young LLP


San Jose, California
January 17, 2000

<PAGE>

                      TERAYON COMMUNICATION SYSTEMS, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
<TABLE>
<CAPTION>
                                                             December 31,
                                                        ----------  ----------
                                                           1999          1998
                                                        ----------  ----------
<S>                                                     <C>         <C>
                          ASSETS
Current assets:
  Cash and cash equivalents.............................  $32,398     $14,342
  Short-term investments................................   80,594      14,538
  Accounts receivable, less allowance for doubtful
   accounts of $1461 in 1999 and $594 in 1998...........   14,015       2,090
  Accounts receivable from related parties..............    7,281       1,549
  Inventory.............................................    4,991       3,950
  Other current assets..................................    4,161       1,856
                                                        ----------  ----------
Total current assets....................................  143,440      38,325
Property and equipment, net.............................    6,157       3,593
Officer note receivable.................................    --            100
Intangibles and other assets............................  151,639         128
                                                        ----------  ----------
Total assets............................................ $301,236     $42,146
                                                        ==========  ==========
           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable......................................  $13,217      $8,600
  Accrued payroll and related expenses..................    5,938       2,475
  Deferred revenues.....................................    4,541         --
  Warranty reserves.....................................    2,685       1,064
  Other accrued liabilities.............................    4,668       1,735
  Current portion of long-term debt.....................       12         --
  Current portion of capital lease obligations..........        5          29
                                                        ----------  ----------
    Total current liabilities...........................   31,066      13,903

Long-term debt..........................................       31         --
Long-term portion of capital lease obligations..........        6          10
Other long-term obligations.............................      480         130
Deferred tax liability..................................   10,998         --

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.001 par value:
  Authorized shares--5,000,000
  Issued and outstanding shares--none...................      --          --
  Common stock, $.001 par value:
  Authorized shares--45,000,000
  Issued and outstanding shares--24,479,379 in 1999 and
   16,458,121 in 1998...................................       24          16
  Additional paid in capital............................  408,854     114,594
  Accumulated deficit................................... (148,381)    (84,301)
  Deferred compensation.................................   (1,553)     (2,184)
  Stockholders' notes receivable........................       (6)        (22)
 Accumulated other comprehensive income.................     (283)        --
                                                        ----------  ----------
    Total stockholders' equity..........................  258,655      28,103
                                                        ----------  ----------
    Total liabilities and stockholders' equity.......... $301,236     $42,146
                                                        ==========  ==========

</TABLE>
                            See accompanying notes.

<PAGE>

                      TERAYON COMMUNICATION SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                            --------------------------------
                                               1999       1998       1997
                                            ---------- ---------- ----------
<S>                                         <C>        <C>        <C>
Revenues:
  Product revenues.......................     $57,345    $19,150     $1,021
  Related party product revenues.........      39,664     12,546        617
  Contract consulting and technology
   development revenues..................        --         --          480
                                            ---------- ---------- ----------
    Total revenues.......................      97,009     31,696      2,118

Cost of goods sold:
  Cost of product revenues...............      46,215     22,296      3,904
  Cost of related party product revenues.      25,829     12,222      2,558
                                            ---------- ---------- ----------
    Total cost of goods sold.............      72,044     34,518      6,462
                                            ---------- ---------- ----------
Gross profit (loss)......................      24,965     (2,822)    (4,344)
Operating expenses:
  Research and development...............      17,579     10,685     11,319
  Cost of product development assistance
    agreement...........................       35,147       --         --
  In-process research and development...       14,600       --         --
  Sales and marketing....................      15,727      6,947      4,468
  General and administrative.............       7,476      3,223      2,546
  Goodwill amortization..................       3,524       --         --
                                            ---------- ---------- ----------
    Total operating expenses.............      94,053     20,855     18,333
                                            ---------- ---------- ----------
Loss from operations.....................     (69,088)   (23,677)   (22,677)
Interest income..........................       5,101        808        396
Interest expense.........................         (93)      (359)      (268)
                                            ---------- ---------- ----------
Net loss.................................     (64,080)   (23,228)   (22,549)
Series F convertible preferred
 stock dividend..........................        --       23,910       --
                                            ---------- ---------- ----------
Net loss applicable to common
 stockholders............................    ($64,080)  ($47,138)  ($22,549)
                                            ========== ========== ==========
Historical basic and diluted net loss
 per share applicable to common
 stockholders............................      ($3.11)    ($5.25)    ($5.26)
                                            ========== ========== ==========
Shares used in computing historical
 basic and diluted net loss per share
 applicable to common stockholders.......      20,630      8,986      4,289
                                            ========== ========== ==========
Pro forma basic and diluted net loss
 per share applicable to common
 stockholders............................                 ($3.41)    ($2.07)
                                                       ========== ==========
Shares used in computing pro forma
 basic and diluted net loss per share
 applicable to common stockholders.......                 13,804     10,873
                                                       ========== ==========
</TABLE>
                            See accompanying notes.
<PAGE>

                      TERAYON COMMUNICATION SYSTEMS, INC.

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                                         Total
                           Convertible                            Addi-                         Stock-   Accumulated Stockholders'
                         Preferred Stock       Common Stock      tional              Deferred  holders'     Other       Equity
                       ----------------------------------------  Paid-In  Accumulate Compen-    Notes   Comprehensive(Net Capital
                          Shares    Amount    Shares    Amount   Capital   Deficit    sation  Receivable   Income     Deficiency)
                       -----------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>     <C>         <C>     <C>        <C>       <C>       <C>       <C>          <C>
Balance at December 31,
 1996..................  6,322,174  25,989   4,138,799      90      --      (14,614)     --         (60)                   11,405
Exercise of options
 for cash to purchase
 common stock..........       --        --     481,648     140      --           --      --        --        --               140
Net cash proceeds from
 issuance of Series D
 preferred stock.......    808,987   9,818        --        --      --           --      --        --        --             9,818
Unearned compensation
 related to stock
 options...............       --        --        --       228      --           --      (228)     --        --             --
Amortization of
 unearned compensation.       --        --        --        --      --           --        12      --        --                12
Net loss applicable to
 common stockholders
 and comprehensive net
 loss applicable to
 common stockholders...       --        --        --        --      --      (22,549)     --        --        --           (22,549)
                       -----------------------------------------------------------------------------------------------------------
Balance at December 31,
 1997..................  7,131,161  35,807   4,620,447     458      --      (37,163)     (216)      (60)     --            (1,174)
Net cash proceeds from
 issuance of Series D
 preferred stock ......    114,089   1,454        --        --      --           --      --        --        --             1,454
Conversion of advance
 from related party to
 Series D preferred
 stock ................    153,846   2,000        --        --      --           --      --        --        --             2,000
Net cash proceeds from
 issuance of preferred stock
 and a  warrant .......    384,615     844        --     4,089      --           --      --        --        --             4,933
Dividends on Series F
 convertible preferred
 stock ................       --        --        --    23,910      --           --      --        --        --            23,910
Value of preferred stock
 warrant issued to
 Series D preferred
 stockholder ..........       --        19        --        --      --           --      --        --        --                19
Exercise of options for
 cash to purchase common
 stock ................       --        --     205,276      56      --           --      --        --        --                56
Exercise of option for
 note receivable to
 purchase common stock
 ......................       --        --      24,375       9      --           --      --          (9)     --             --
Value of common stock
 warrant ..............       --        --        --        35      --           --      --        --        --                35
Cash proceeds from
 payment on a
 stockholder note
 receivable ...........       --        --        --        --      --           --      --          47      --                47
Unearned compensation
 related to stock
 options ..............       --        --        --     1,849      --           --    (1,849)     --        --             --
Transfer to additional
 paid in capital
 as a result of
 reincorporation.......       --   (40,116)       --   (30,401)    70,517        --      --        --        --             --
Conversion of preferred
 stock into common
 stock upon the initial
 public offering ...... (7,783,711)     (8)  7,783,711       8      --           --      --        --        --             --
Issuance of common
 stock in connection
 with the initial
 public offering, net
 of issuance costs.....       --        --   3,000,000       3     35,133        --      --        --        --            35,136
Conversion of
 redeemable preferred
 stock to common stock
 upon the initial
 public offering ......       --        --     576,924      --      7,500        --      --        --        --             7,500
Conversion of
 redeemable common
 stock upon the initial
 public offering ......       --        --      10,000      --         13        --      --        --        --                13
Exercise of common
 stock warrant for cash       --        --      50,000      --        500        --      --        --        --               500
Issuance of common stock
 in legal settlement to
 an employee ..........       --        --      13,000      --        169        --      --        --        --               169
Exercise of options
 for cash to purchase
 common stock..........       --        --     174,388      --        222        --      --        --        --               222
Unearned compensation
 related to stock
 options...............       --        --        --        --        540        --      (540)     --        --             --
Amortization of
 unearned compensation
 related to stock
 options...............       --        --        --        --      --           --       421      --        --               421
Net loss applicable to
 common stockholders
 and comprehensive net
 loss applicable to
 common stockholders...       --        --        --        --      --      (47,138)     --        --        --           (47,138)
                       -----------------------------------------------------------------------------------------------------------
Balance at December
 31, 1998..............       --      $ --  16,458,121     $16   $114,594  ($84,301)  ($2,184)     ($22)     --           $28,103
Issuance of common
 stock , net of issuance
 costs.................       --          -  2,101,946       2     75,123        --        --        --        --          75,125
Exercise of options
 for cash to purchase
 common stock..........       --          -    963,993       1      2,486        --        --        --        --           2,487
Exercise of common
 stock warrant for cash       --          -  3,000,000       3     19,497        --        --        --        --          19,500
Cash proceeds from
 payment on a
 stockholder note
 receivable ...........       --          -       --          -       --         --        --        16        --              16
Amortization of
 unearned compensation
 related to stock......       --          -       --          -       --         --       631        --        --             631
Issuance of warrant to
  purchase common stock       --          -       --          -    35,587        --        --        --        --          35,587
Issuance of common stock
  for Employee Stock
  Purchase Plan........       --          -    101,163        -     1,170        --        --        --        --           1,170
Compensation expense related
  to option acceleration for
  terminated employees.       --          -       --          -       856        --        --        --        --             856
Compensation expense for
  common stock issued in
  exchange for services       --          -       --          -        61        --        --        --        --              61
Compensation expense for
  common stock issued in lieu
  of bonus.............       --          -        596        -        25        --        --        --        --              25
Acquisition of Imedia
 Corporation...........       --          -    857,407       1    106,737        --        --        --        --         106,738
Acquisition of Radwiz
  Limited..............       --          -    996,153       1     52,718        --        --        --        --          52,719
Comprehensive income:
   Increase in unrealized gain
   on short-term
   investments.........       --          -       --          -       --         --        --        --         (283)        (283)
   Net loss applicable to
   common stockholders.       --          -       --          -       --    (64,080)       --        --        --         (64,080)
                                                                                                                     -------------
     Comprehensive income...                                                                                              (64,363)
                       -----------------------------------------------------------------------------------------------------------
Balance at December
 31, 1999..............       --          - 24,479,379     $24   $408,854 ($148,381)  ($1,553)      ($6)       ($283)    $258,655
                       ===========================================================================================================
</TABLE>
                            See accompanying notes.
<PAGE>

                      TERAYON COMMUNICATION SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                  -----------------------------
                                                    1999      1998      1997
                                                  --------- --------- ---------
<S>                                               <C>       <C>       <C>
Operating activities:
Net loss applicable to common stockholders......  ($64,080) ($47,138) ($22,549)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization.................     2,121     1,992     1,563
  Amortization of intangible assets.............     6,089        --        --
  In-process research and development..........     14,600        --        --
  Amortization of unearned compensation related
   to stock options.............................       631       421        12
  Loss on disposal of fixed assets..............        33        --        --
  Compensation expense for common stock issued
   in exchange for consuting services..........         61        --        --
  Value of common and preferred stock warrants
   issued.......................................    35,587        54        --
  Series F convertible preferred stock
   dividend.....................................        --    23,910        --
  Issuance of common stock to an employee.......        25        --        --
  Option acceleration related to a
    terminated employee.........................       856        --        --
  Changes in operating assets and liabilities:
   Accounts receivable..........................   (11,925)   (1,516)     (574)
   Accounts receivable from related parties.....    (5,732)   (1,187)     (362)
   Inventory....................................    (1,041)   (2,628)   (1,322)
   Other current assets.........................    (2,305)   (1,166)     (391)
   Accounts payable.............................     4,617     6,368     1,550
   Accrued payroll and related expenses.........     3,463     1,423       482
   Deferred revenues............................     4,541        --        --
   Warranty reserves............................     1,621       528       536
   Other accrued liabilities....................     2,933       914       540
   Deferred revenue.............................        --       (95)     (330)
   Deferred rent................................         5         4        24
   Other noncurrent liabilities.................        --        --       (24)
                                                  --------- --------- ---------
Net cash used in operating activities...........    (7,900)  (18,116)  (20,845)
                                                  --------- --------- ---------
Investing activities:
Purchases of short-term investments.............  (217,323)  (32,959)  (10,995)
Proceeds from sales and maturities of
 short-term investments.........................   150,984    18,839    15,085
Purchases of property and equipment.............    (4,718)   (1,970)   (2,606)
Officer note receivable.........................       100        --        --
Purchase of developed technology................    (1,850)       --        --
Purchase of other assets........................      (508)       --        15
Cash received from Imedia acquisiton............       202        --        --
Cash received from Radwiz acquisition...........     2,457        --        --
Cash paid for acquisition of Radwiz.............      (250)
Pre-acquisition loan to Imedia..................    (1,800)       --        --
                                                  --------- --------- ---------
Net cash provided by (used in) investing
 activities.....................................   (72,706)  (16,090)    1,499
                                                  --------- --------- ---------
Financing activities:
Principal payments on capital leases............       (28)      (70)     (144)
Principal payments on long-term debt............        --    (2,812)     (909)
Proceeds from long-term debt....................        43        --     1,654
Increase in other noncurrent liabilities.......        355        --         0
Exercise of options and warrant to purchase
 common stock...................................    21,983       778       140
Advance from related party......................        --        --     2,000
Proceeds from issuance of preferred stock.......        --     6,387     9,818
Proceeds from issuance of redeemable preferred
 stock..........................................        --     7,500        --
Principal payments on redeemable common
 stockholder and common stockholder notes
 receivable.....................................        16        60        --
Proceeds from issuance of common stock..........    76,293    35,136        --
                                                  --------- --------- ---------
   Net cash provided by financing activities....    98,662    46,979    12,559
                                                  --------- --------- ---------
Net increase (decrease) in cash and cash
 equivalents....................................    18,056    12,773    (6,787)
Cash and cash equivalents at beginning of year..    14,342     1,569     8,356
                                                  --------- --------- ---------
Cash and cash equivalents at end of year........   $32,398   $14,342    $1,569
                                                  ========= ========= =========
Supplemental disclosures of cash flow
 information:
Cash paid for interest..........................        $0      $359      $268
Supplemental noncash investing and financing
 activities:
Exercise of option for note receivable to
 purchase redeemable common stock...............     $ --      $ --        $13
Exercise of option for note receivable to
 purchase common stock..........................     $ --         $9     $ --
Conversion of advance from related party to
 Series D preferred stock.......................     $ --     $2,000     $ --
Issuance of common stock in legal settlement to
 an employee....................................     $ --       $169     $ --
Conversion of preferred stock to common stock...     $ --         $8     $ --
Conversion of redeemable preferred stock to
 common stock ..................................     $ --     $7,500     $ --
Conversion of redeemable common stock to common
 stock .........................................     $ --        $13     $ --
Acquisition of Imedia Corporation...............  $106,737     $ --         $0
Acquisition of Radwiz Ltd.......................   $52,468     $ --         $0

</TABLE>
                            See accompanying notes.

<PAGE>


1. Organization and Summary of Significant Accounting Policies

 Description of Business

        Terayon Communication Systems, Inc. (the Company) was incorporated
under the laws of the state of California on January 20, 1993 for the
purpose of developing, producing, and marketing broadband access system
products. In October 1997, the Company changed its legal name from
Terayon Corporation. In July 1998, the Company reincorporated in the
State of Delaware.

 Basis of Consolidation

        The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Imedia Corporation ("Imedia")
and Radwiz, Ltd. ("Radwiz"), and its majority owned subsidiaries,
Terayon Communication Systems Europe and Terayon do Brasil. The minority
interests in net losses of Terayon Communication Systems Europe and
Terayon do Brasil were insignificant for all periods presented. All
material intercompany balances and transactions have been eliminated.

 Use of Estimates

        The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

Reclassifications

        Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation.

 Advertising Expenses

        The Company accounts for advertising costs as expense in the period
in which they are incurred. Advertising expense for the years ended
December 31, 1999, 1998 and 1997 was not significant.

 Research and Development Costs

        Research and development costs are charged to expense as incurred.

 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 investments are classified as
available-for-sale and can be readily liquidated to meet current
operational needs. The Company accounts for investments in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Management
determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet
date. The Company's short-term investments, which consist primarily of
commercial paper, U.S. government and U.S. government agency obligations
and fixed income corporate securities, are classified as available-for-
sale and are carried at amortized cost which approximates fair market
value. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization, as well as any interest on the securities,
is included in interest income. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold
is based on the specific identification method. The Company had no
investments in equity securities at either December 31, 1999 or December
31, 1998.

 Concentrations of Credit Risk, Customer, Supplier, and Product



        The Company operates in one business segment, the development and
sale of broadband access systems, which it sells primarily to customers
within the cable and communications industries, including related
parties (see Note 15). The Company performs ongoing credit evaluations
of its customers and generally requires no collateral. A relatively
small number of customers and resellers account for a significant
percentage of the Company's revenues. The Company expects that the sale
of its products to a limited number of customers and resellers may
continue to account for a high percentage of revenues for the
foreseeable future.



        Currently, the Company relies on single source suppliers of materials
and labor for the significant majority of its product inventory but is
actively pursuing additional supplier alternatives. As a result, should
the Company's current suppliers not produce and deliver inventory for
the Company to sell on a timely basis, operating results may be
adversely impacted.

        Substantially all of the Company's revenues have been attributable to
sales of the TeraLink and the TeraPro. These products are expected to
account for a significant part of the Company's revenues for the
foreseeable future. As a result, a decline in demand for or failure to
achieve broad market acceptance of the TeraLink or the TeraPro would
adversely affect operating results.

        In addition, market acceptance of the Company's products may be
affected by the emergence and evolution of industry standards. While the
Company expects its products to become compliant with industry
standards, its inability to do so may adversely affect operating
results.

        The Company invests its excess cash in debt instruments of
governmental agencies, and corporations with credit ratings of AA/AA- or
better or A1/P1 or better, respectively. The Company has established
guidelines relative to diversification and maturities that attempt to
maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.

 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>
                                          December 31,
                                     ---------------------
                                        1999       1998
                                     ---------- ----------
<S>                                  <C>        <C>
  Finished goods....................    $3,201     $3,355
  Work-in-process...................       583        170
  Raw materials.....................     1,207        425
                                     ---------- ----------
                                        $4,991     $3,950
                                     ========== ==========
</TABLE>


        During the year ended December 31, 1998 the Company was required to
purchase inventory components from its previous contract manufacturer
that were subsequently sold to its current contract manufacturer. As a
result of the transition to the Company's current contract manufacturer,
the Company recorded a charge of approximately $1,300,000. A portion of
the charge consisted of approximately $750,000 of raw material
components that were deemed obsolete due to a design change in the
Company's bill of materials. The charge also consisted of a write down
of approximately $550,000 for parts repurchased from the Company's
previous contract manufacturer and then resold to the Company's current
contract manufacturer, as the Company's current contract manufacturer
could purchase the related parts at a lower cost than the Company had
valued the inventory. Therefore, the Company wrote down the inventory to
the lower of cost or market as part of selling the inventory to its
current contract manufacturer.

 Property and Equipment

        Property and equipment are carried at cost less accumulated
depreciation and amortization. Property and equipment are depreciated
for financial reporting purposes using the straight-line method over the
estimated useful lives of three to five years. Leasehold improvements
are amortized using the straight-line method over the shorter of the
useful lives of the assets or the terms of the leases. The
recoverability of the carrying amount of property and equipment is
assessed based on estimated future undiscounted cash flows and if an
impairment exists the charge to operations is measured as the excess of
the carrying amount over the fair value of the assets. Based upon this
method of assessing recoverability, no asset impairment occurred in any
of the years presented.

        Property and equipment are as follows (in thousands):

<TABLE>
<CAPTION>
                                          December 31,
                                     ---------------------
                                        1999       1998
                                     ---------- ----------
<S>                                  <C>        <C>
  Software and computers............    $7,729     $4,411
  Furniture and equipment...........     7,410      3,567
  Leasehold improvements............       459        197
  Automobiles.......................       165      --
                                     ---------- ----------
                                        15,763      8,175
  Accumulated depreciation and
   amortization.....................    (9,606)    (4,582)
                                     ---------- ----------
  Property and equipment, net.......    $6,157     $3,593
                                     ========== ==========
</TABLE>


Intangibles and Other Assets

        Intangibles and other assets consisted of the following at December
31, 1999 (in thousands):

<TABLE>


<S>                                              <C>
Developed technology, gross.....................   $56,850
Goodwill, gross.................................    87,942
Other intangibles, gross........................    10,450
                                                 -----------
                                                   155,242
Accumulated amortization of intangible assets...    (6,089)
                                                 -----------
Intangibles, net................................   149,153
Other Assets...................................      2,486
                                                 -----------
      Total intangibles and other assets........  $151,639
                                                 ===========

</TABLE>

 Revenue Recognition

        The Company sells it products directly to broadband access service
providers, system resellers and distributors. Revenues related to
product sales are generally recognized when the products are shipped to
the customer. A provision is made for estimated product returns as
product shipments are made. The Company's existing agreements with its
system resellers and distributors do not contain price protection
provisions and do not grant return rights beyond those provided by the
Company's standard warranty. The Company has also performed some
research and product development work under best efforts technology
development agreements. Due to technological risk factors, the costs of
these agreements were expensed as incurred and were included in cost of
goods sold in prior years. Revenues under technology development
agreements are recognized when applicable customer milestones have been
met, including deliverables and, in any case, not in excess of the
amount that would be recognized using the percentage-of-completion
method. The Company met milestones under an agreement in the fourth
quarter of the year ended December 31, 1997 and recognized the related
revenue (see Note 4).

 Warranty Reserves

        The Company's products generally carry a one-year warranty that
includes factory and on-site repair services as needed for replacement
of parts. Estimated expenses for warranty obligations are accrued as
revenue is recognized. Reserve estimates are adjusted periodically to
reflect actual experience.

 Stock-Based Compensation

        As described in Note 10, the Company has elected to account for its
employee stock plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion
No. 25), and to adopt the disclosure-only provisions as required under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123).

 Comprehensive Income

        The Company has adopted Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 requires that all
items required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of net unrealized gain on short-
term investments for the year ended December 31, 1999. The Company's
comprehensive net loss was the same as its net loss for the years ended
December 31, 1998 and 1997.

 Segments of an Enterprise

        Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 superseded
Statement of Financial Accounting Standards No. 14, "Financial Reporting
for Segments of a Business Enterprise". FAS 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports. FAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 did not affect the Company's
results of operations or financial position, and did not affect the
disclosure of segment information (see Note 12).

 Net Loss Per Share Applicable to Common Stockholders

        Historical basic and diluted net loss per share applicable to common
stockholders was computed using the weighted average number of common
shares outstanding. Options, warrants, restricted stock and preferred
stock were not included in the computation of historical 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 data):

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

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                            --------------------------------
                                               1999       1998       1997
                                            ---------- ---------- ----------
<S>                                         <C>        <C>        <C>
Net loss..................................   ($64,080)  ($23,228)  ($22,549)
Series F convertible preferred stock
  dividend (note 10).......................      --       23,910       --
                                            ---------- ---------- ----------
Net loss applicable to common
 stockholders.............................   ($64,080)  ($47,138)  ($22,549)
                                            ========== ========== ==========

Shares used in computing historical
 basic and diluted net loss per share
 applicable to common stockholders........     20,630      8,986      4,289

Historical basic and diluted net loss
 per share applicable to common
 stockholders.............................     ($3.11)    ($5.25)    ($5.26)
                                            ========== ========== ==========

Shares used in computing historical
 basic and diluted net loss per share
 applicable to common stockholders........                 8,986      4,289

Adjustment to reflect the effect of the
 assumed conversion of weighted average
 shares of  convertible preferred stock
 outstanding applicable to common
 stockholders.............................                 4,818      6,584
                                                       ---------- ----------
Shares used in computing pro forma
 basic and diluted net loss per share
 applicable to common stockholders........                13,804     10,873
                                                       ========== ==========

Pro forma basic and diluted net loss
 per share applicable to common
 stockholders............................                 ($3.41)    ($2.07)
                                                       ========== ==========
</TABLE>


        Options to purchase 4,442,269 and 2,691,234 shares of common stock
were outstanding at December 31, 1999 and 1998, respectively, and
warrants to purchase 2,036,159 and 3,019,191 shares of common stock were
outstanding at December 31, 1999 and 1998, respectively, but were not
included in the computation of diluted net loss per share, since the
effect would be antidilutive.

 Impact of Recently Issued Accounting Standard

        In September 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 September 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.

        In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements."  SAB 101 provides guidance on the recognition, presentation
and disclosure of revenue in the financial statements of public
companies.  Changes in the Company's revenue recognition policy
resulting from SAB 101 would be reported as a change in accounting
principle and would result in a cumulative adjustment in the second
quarter to reflect the deferral of revenue for shipments previously
recognized as revenue that did not meet the revenue recognition criteria
established by SAB 101.  The Company currently cannot determine the
effect, if any, that SAB 101 will have on the Company's financial
statements.  Management believes that SAB 101, to the extent it is
applicable to the Company, will not effect the underlying strength or
weakness of the Company's business operations as measured by the dollar
value of the Company's shipments and cash flows.

2. Fair Value of Financial Instruments

        The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.

<TABLE>
<CAPTION>
                                                   December 31, 1999
                                     -------------------------------------------
                                                  Gross      Gross    Estimated
                                     Amortized  Unrealized Unrealized    Fair
Short-term investments                  Cost      Gains      Losses     Value
------------------------------------ ---------- ---------- ---------- ----------
                                                   (in thousands)
<S>                                  <C>        <C>        <C>        <C>
Commercial paper....................   $30,027     $  --      $  --     $30,027
Government agency obligations.......    41,780        --        (255)    41,525
Fixed income corporate securities..      9,070        --         (28)     9,042
                                     ---------- ---------- ---------- ----------
  Total.............................   $80,877     $  --       ($283)   $80,594
                                     ========== ========== ========== ==========

<CAPTION>
                                                   December 31, 1998
                                     -------------------------------------------
                                                  Gross      Gross    Estimated
                                     Amortized  Unrealized Unrealized    Fair
Short-term investments                  Cost      Gains      Losses     Value
------------------------------------ ---------- ---------- ---------- ----------
                                                   (in thousands)
<S>                                  <C>        <C>        <C>        <C>
Commercial paper....................    $8,426     $  --      $  --      $8,426
Government agency obligations.......     6,112        --         --       6,112
                                     ---------- ---------- ---------- ----------
  Total.............................   $14,538     $  --      $  --     $14,538
                                     ========== ========== ========== ==========

</TABLE>


        Realized gains and losses were insignificant for each of the three
years in the period ended December 31, 1999.

3. Officer Note Receivable

        In March 1996, the Company loaned an officer $100,000 pursuant to a
promissory note. The note was paid in full in 1999.

4. Technology Development Agreement

        On January 4, 1995, the Company entered into a Development and
Production Agreement with a telecommunications systems manufacturer (the
Manufacturer), whereby the Company agreed to develop an enabling
technology for use with certain manufacturer technology (the Product).
Pursuant to the agreement, the Manufacturer is obligated to purchase
certain minimum quantities of the Product, and the Company has agreed to
provide the Product to the Manufacturer on favorable pricing terms for a
period of four years following completion of the Product. In addition,
the Company has agreed that for the first three months following the
completion of the Product, the Company will not sell the Product to any
third party for use in the carrying of voice-over coaxial cables.

        In accordance with the agreement, the Company will receive funding
from the Manufacturer totaling $1,000,000. These payments were
originally received upon the completion of certain milestones set forth
in the agreement. As of December 31, 1997, approximately $480,000 of
cash advances had been received under the agreement. In the fourth
quarter of the year ended December 31, 1997, the Company delivered the
Product under the agreement and recognized the $480,000 as revenue. In
March 1998, the agreement was amended, and the Company is to receive the
remaining payments (in addition to normal Product billings) over a
certain number of future unit shipments to the Manufacturer.

5. Commitments

        The Company leases its facilities and certain equipment under
operating leases. The operating lease for the Company's facilities
expire in 2002 and 2003. Rental expense was approximately $1,013,000,
$853,000, and $850,000 for the years ended December 31, 1999, 1998, and
1997, respectively.   In October 1999, the Company subleased the
facilities formerly occupied by Imedia Corporation to a third party
through 2003.  Sublease rental income was approximately $57,400 for the
period from September 16, 1999 (acquisition date) to December 31, 1999.

        The Company leases certain equipment under noncancelable lease
agreements that are accounted for as capital leases. Equipment under
capital lease arrangements and included in property and equipment
aggregated approximately $34,600 and $452,000 at December 31, 1999 and
1998, respectively. Related accumulated amortization was approximately
$29,300 and $375,000 at December 31, 1999 and 1998, respectively.
Amortization expense related to assets under capital leases is included
in depreciation expense. In addition, the capital leases are secured by
the related equipment and the Company is required to maintain liability
and property damage insurance.

        Future minimum lease payments under noncancelable operating leases
and capital leases are as follows (in thousands):

  Future minimum lease payments under noncancelable operating leases and
capital leases are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  December 31, 1999
                                                ---------------------
                                                Operating   Capital
                                                  Leases     Leases
                                                ---------- ----------
<S>                                             <C>        <C>
   2000......................................      $1,972         $6
   2001......................................       2,015          7
   2002......................................         957
   2003......................................          99       --
                                                ---------- ----------
   Total minimum payments....................      $5,043         13
                                                ==========
   Less amount representing interest.........                      2
                                                           ----------
                                                                  11
   Less current portion......................                      5
                                                           ----------
                                                                  $6
                                                           ==========
</TABLE>


        Future minimum sublease payments to be received under noncancelable
subleases are approximately $878,000.

Unconditional Purchase Obligations

        The Company has unconditional purchase obligations to a few of its
suppliers that support the Company's ability to manufacture its
products. The obligations require the Company to purchase minimum
quantities of the suppliers' products at a specified price. At December
31, 1999, the Company had approximately $48,829,000 of unconditional
purchase obligations ($10,281,000 at December 31, 1998).

Royalties

        The Company has purchased, through its acquisition of Radwiz Ltd.,
certain technology that was developed by Radwiz and a former sister
company utilizing funding provided by the Israeli Chief Scientist of the
Ministry of Industry and Trade ("OCS").  The purchase of the technology
was approved by the OCS. As a condition for this approval, the Company
has committed to pay royalties to the Government of Israel on proceeds
from sales of products based on this technology.  Royalty rates are 3% -
5%.  Royalties are payable from the commencement of sales of products
based on the technology until the cumulative amount of the royalties
paid and accrued by the Company equals 100% of the dollar amount
received.  The Company's total obligation for royalties, based on
royalty-bearing Government participations received or accrued, net of
royalties paid or accrued, totaled approximately $5,900,000 at December
31, 1999.

6. Debt Obligations

        The Company has a credit agreement with a bank to provide a line of
credit in an amount of $2,500,000.   At December 31, 1999, the Company
had an unused standby letter of credit of $150,000 outstanding against
the line of credit and $2,350,000 was available under the line of
credit.

        The credit agreement provides for interest at a rate equal to prime
(8.5% at December 31, 1999) and matures one year from the date of the
agreement. At December 31, 1999, there were no outstanding borrowings
under this credit agreement and approximately $2,500,000 was available.

        Outstanding borrowings under the credit agreement are secured by
certain Company assets. The credit agreement contains affirmative and
negative covenants and requires, among other things, that the Company
maintain its primary banking relationship with the bank. The credit
agreement also limits, among other things, the Company's ability to
incur additional debt, to pay cash dividends, or to purchase or sell
certain assets. Finally, the agreement restricts the Company to a
minimum tangible net worth and prohibits certain acquisitions, mergers,
consolidations, or similar transactions without the prior consent of the
bank.

        In 1999, Radwiz borrowed approximately $43,000 from an Israeli bank.
The borrowing bore interest at LIBOR plus 1.25% and was paid in full
subsequent to December 31, 1999.

        The Company incurred interest expense related to the debt
obligations of approximately $22,000, $256,000, and $205,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.

7.  Accrued Severance Pay

Radwiz is subject to Israeli law and labor agreements, under which
Radwiz is required to make severance payments to dismissed employees and
employees leaving its employment in certain other circumstances.
Radwiz's severance pay liability to its employees, which is calculated
on the basis of the salary of each employee for the last month of the
reported year multiplied by the years of such employee's employment is
included in the Company's consolidated balance sheet on the accrual
basis, and is partially funded by a purchase of insurance policies in
Radwiz's name.  At December 31, 1999, approximately $329,000 for accrued
severance pay was included in other long-term obligations.
Approximately $165,000 relating to the amounts funded by the purchase of
insurance policies was included in other assets at December 31, 1999.

8. Contingencies

        The Company received letters from two individuals claiming that the
Company's technology infringes patents held by these individuals. The
Company has reviewed the allegations made by these individuals and,
after consulting with its patent counsel, the Company does not believe
that its technology infringes any valid claim of these individuals'
patents. If the issues are submitted to a court, the court could find
that the Company's products infringe these patents. In addition, these
individuals may continue to assert infringement. If the Company is found
to have infringed these individuals' patents, it could be subject to
substantial damages and/or an injunction preventing it from conducting
its business. In addition, other third parties may assert infringement
claims against the Company in the future. An infringement claim, whether
meritorious or not, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. These royalty or licensing
agreements may not be available on terms acceptable to the Company or at
all. The Company has reviewed the allegations made by these individuals
and management does not believe that the outcome will have a material
adverse effect on the Company's financial position, results of
operations, or cash flows.

        In September 1999, Imedia Corporation, now a subsidiary of the
Company, was named as a defendant in a case alleging that Imedia
breached its term sheet agreement with the Plaintiffs by negotiating
with the Company while a no shop provision was in place and refusing to
allow the Plaintiffs to invest in Imedia.  The Plaintiffs are seeking
damages in excess of $12.0 million.  As part of the terms of the Imedia
Agreement and Plan of Merger and Reorganization, shares of the Company's
common stock to be issued to the former shareholders of Imedia were
placed in escrow to indemnify the Company for any damages that are
directly or indirectly suffered as a result any claim brought by any
Person who was a prospective investor in Imedia and was not a
securityholder of Imedia on the closing date of the Imedia acquisition.
The value of the escrowed shares was approximately $10.0 million based
on the market value of the Company's common stock on the closing date.
The case is in its initial stages, and no trial date has been
established.  The Company has reviewed the allegations made by the
Plaintiffs and management does not believe that the outcome will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.

         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.

9.  Public Offerings

        In August 1998, the Company completed its initial public offering and
issued 3,000,000 shares of its common stock to the public at a price of
$13.00 per share. The Company received net proceeds of approximately
$35,136,000 in cash. Upon the closing of the offering, all of the
outstanding shares of convertible preferred stock, redeemable
convertible preferred stock, and redeemable common stock outstanding
were converted into an aggregate of 8,360,635 shares of common stock.

        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 an
additional 487,500 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
additional proceeds of approximately $12,700,000 to the Company.

10. Redeemable Stock

        In 1998, the Company issued 384,616 shares of Series D redeemable
convertible preferred stock resulting in proceeds of approximately
$5,000,000 and also issued 192,308 shares of Series F redeemable
convertible preferred stock resulting in proceeds of approximately
$2,500,000. The Series D and F redeemable preferred stockholders had
options ("Put Rights") to sell the Company some or all of the Series D
and F redeemable convertible preferred stock at $13.00 per share. The
Put Rights expired upon the completion of the Company's initial public
offering in August 1998.

        In conjunction with the Series D redeemable convertible preferred
stock agreement, the Company issued a warrant to purchase 38,462 shares
of Series D convertible preferred stock. The Company recorded expense of
$19,000 to reflect the value of the warrant. In August 1998, the Company
completed its initial public offering (see Note 9) which caused the
termination of the unexercised warrant.

        In September 1997, the Company issued redeemable common stock to an
employee in return for a full recourse note receivable for $13,000. The
note bore an interest rate of 5.81% per annum and was due in September
1998. The note was paid in full in January 1998. Pursuant to the stock
purchase agreement, the employee had the option to sell some or all of
his shares to the Company on or after September 22, 1998 at a purchase
price of $13.00 per share (the "Put Price"). Such option expired upon
the earlier of (a) September 22, 2003 or (b) the completion of the
Company's initial public offering of shares of its common stock. In
August 1998, the Company completed its initial public offering (see Note
9) which caused the termination of the option and the conversion of the
redeemable common stock into the Company's common stock. The Company
expensed approximately $88,000 and $29,000 for the years ended December
31, 1998 and 1997, respectively, representing the difference between the
common stock's per share price and the Put Price over the option's
vesting period.

11. Stockholders' Equity

 Common Stock

        In 1998, the Company's stockholders approved an increase in the
authorized number of common shares from 20,000,000 shares to 30,000,000
shares.

        In 1999, the Company's stockholders approved an increase in the
authorized number of common shares from 30,000,000 to 45,000,000.

 Preferred Stock

        In 1998, the Company's Certificate of Incorporation was amended to
authorize 5,000,000 shares of preferred stock which the Board of
Directors has the authority to fix or alter the designation, powers,
preferences and rights of the shares of each such series and
qualifications, limitations or restrictions to any unissued series of
preferred stock.

 Delaware Reincorporation

        In July 1998, the Company's stockholders approved the Company's
reincorporation in Delaware. The par value of the preferred and common
stock is $.001 per share. The Company's reincorporation has been
reflected in the consolidated financial statements. The change resulted
in the transfer of $40,116,000 from convertible preferred stock and
$30,401,000 from common stock to additional paid-in capital.

  Common Stock Warrants

        In conjunction with a Series F convertible preferred stock financing
in April 1998, the Company issued a warrant to purchase 3,000,000 shares
of the Company's common stock at an exercise price of $6.50 per share to
Shaw Communications, Inc. (the "Shaw Warrant"). The Shaw Warrant is
exercisable at any time prior to December 31, 2003. In addition, the
Company issued a warrant (the "Anti-Dilution Warrant") to purchase an
indeterminate number of shares of common stock. The Anti-Dilution
Warrant is exercisable at the option of Shaw Communications, Inc.
("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. In
June 1998, the Company issued certain equity securities that, as of
December 31, 1998, require the Company to issue an additional 19,191
shares of common stock pursuant to the Anti-Dilution Warrant.  In 1999,
the Company issued certain equity securities that, as of December 31,
1999, require the Company to issue an additional 16,968 shares of common
stock pursuant to the Anti-Dilution Warrant.  The Company recorded
expenses of approximately $439,000 for the year ended December 31, 1999
relating to shares issuable pursuant to the Anti-Dilution Warrant.

        The Company recorded a dividend of $23,910,000 in the quarter ended
June 30, 1998, representing the fair value of the Shaw Warrant under
EITF No. 96-13, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock." The Company's
accounting conclusion with respect to the Shaw Warrant issued in
connection with the sale of the convertible preferred stock (the "Shaw
Financing") is based on management's conclusion that the sale of
convertible preferred stock was, in substance, a financing transaction
and not the issuance of equity instruments in exchange for goods or
services.

        In March 1999, Shaw purchased 1,500,000 shares of the Company's
common stock at $6.50 per share and in November 1999 Shaw purchased an
additional 1,500,000 shares of the Company's common stock at $6.50 per
share, resulting in net proceeds to the Company of $19.5 million.  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.

        In June 1998, the Company issued a warrant to purchase 50,000 shares
of the Company's common stock at $10.00 per share. The Company recorded
an expense of $35,000 to reflect the value of the warrant in the year
ended December 31, 1998.        The warrant was exercised in August 1998.

        On March 18, 1999, the Company entered into a one-year Product
Development Assistance Agreement ("Development Agreement") with Rogers
Communications Inc. Under the terms of the Development Agreement, Rogers
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 will provide the Company 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
entering into the Development Agreement, the Company 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 in full or in part through March 31, 2000.
The fair value of the two warrants was approximately $45,000,000 and
will be a noncash charge included in operations over the term of the
Product Development Assistance Agreement.  As a result of the
Development Agreement, the Company's results for 1999 include a noncash
charge of  $35.1 million. Subsequent to December 31, 1999, Rogers
exercised the warrants on a cashless basis resulting in the issuance of
1,843,809 shares of the Company's common stock and no proceeds to the
Company.

Common Stock Reserved

        Common stock reserved for issuance is as follows:

<TABLE>
<CAPTION>

                                      December 31,
                                         1999
                                      -----------
<S>                                   <C>
 Common stock options...............   6,803,514
 Common stock warrants..............   2,033,879
 Employee stock purchase plan.......     598,837
                                      -----------
                                       9,436,230
                                      ===========
</TABLE>

Stock-Based Compensation

        In March 1995 and February 1997, the Board of Directors approved a
stock option plan and an equity incentive plan, respectively, that
authorized the grant of options to purchase shares of the Company's
common stock. In June 1998, the Company's Board of Directors authorized
the adoption of the amended 1997 Equity Incentive Plan, increasing the
aggregate number of shares authorized for issuance under the 1997 Plan
to 3,300,000 shares (2,250,000 additional shares). However, each year on
January 1, starting with January 1, 1999, the aggregate number of shares
that are available for issuance under the 1997 Plan will automatically
be increased to a number equal to 5% of the Company's outstanding shares
of common stock on such date. In addition, in June 1998, the Company's
Board of Directors authorized the adoption of the 1998 Non-Employee
Directors' Stock Option Plan, pursuant to which 200,000 shares of the
Company's common stock have been reserved for future issuance to non-
employee directors of the Company. In October 1999, the Company's Board
of Directors authorized the adoption of the 1999 Non-Officers Equity
Incentive Plan, pursuant to which 3,000,000 shares of the Company's
common stock have been reserved for future issuance to non-officer
employees of the Company.  At December 31, 1999, the total authorized
number of shares under the 1995, 1997, 1998 and 1999 plans was
2,114,747, 3,300,000, 200,000 and 3,000,000 respectively. The plans are
administered by the Board of Directors and provide for incentive stock
options or nonqualified stock options to be issued to employees,
directors, and consultants of the Company. Prices for incentive stock
options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less
than 85% of the fair value of the common stock at the date of grant.
Options are immediately exercisable and vest over a period not to exceed
five years from the date of grant. Any unvested stock issued is subject
to repurchase by the Company at the original issuance price upon
termination of the option holder's employment. Unexercised options
expire ten years after the date of grant.

        In March and July 1997, the Board of Directors authorized grants of
common stock options outside the Company's stock option plans. The
options are for 70,000 shares of common stock and generally vest over a
three-year period in six equal installments occurring every six months.
In May and June 1998, the Board of Directors authorized additional
grants of 70,000 shares of common stock outside the Company's stock
option plans.

        During the years ended December 31, 1998 and 1997, the Company
recorded aggregate deferred compensation of approximately $2,389,000 and
$228,000, respectively, representing the difference between the grant
price and the deemed fair value of the Company's common stock options
granted during these periods. The amortization of deferred compensation
is being charged to operations and is being amortized over the vesting
period of the options, which is typically five years. For the years
ended December 31, 1999,1998 and 1997,  the amortized expense was
approximately $631,000,$421,000 and 12,000, respectively.

        The following is a summary of additional information with respect to
the 1995 Stock Option Plan, the 1997 Equity Incentive Plan, the 1998
Non-Employee Directors' Stock Option Plan, the 1999 Non-Officer Equity
Incentive Plan and option grants made outside the plans:

<TABLE>
<CAPTION>
                                                          Options
                                                        Outstanding
                                                      and Exercisable
                                                  -----------------------
                                                               Weighted-
                                        Options     Number      Average
                                       Available      of       Exercise
                                       for Grant    Shares       Price
                                      ----------- ----------- -----------
<S>                                   <C>         <C>         <C>
Balance at December 31, 1996........     121,578   1,886,950       $0.31
  Options authorized................   1,120,000         --        $ --
  Options granted...................  (1,304,050)  1,304,050       $1.71
  Options exercised.................         --     (481,648)      $0.30
  Options canceled..................     372,168    (372,168)      $0.56
                                      ----------- -----------
Balance at December 31, 1997........     309,696   2,337,184       $1.05
  Options authorized................   2,520,000         --        $ --
  Options granted...................  (1,185,081)  1,185,081       $9.45
  Options exercised.................         --     (404,039)      $0.69
  Options canceled..................     426,992    (426,992)      $2.79
                                      ----------- -----------
Balance at December 31, 1998........   2,071,607   2,691,234       $4.54
  Options authorized................   3,000,000         --          --
  Options granted...................  (3,913,284)  3,913,284      $44.00
  Options exercised.................                (963,993)      $3.46
  Options canceled..................     469,356    (469,356)     $11.67
  Options Repurchased...............       4,666                   $0.50
                                      ----------- -----------
Balance at December 31, 1999........   1,632,345   5,171,169      $33.56
                                      =========== ===========
</TABLE>

  In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                                       Options Outstanding and Exercisable
                                      -----------------------------------
                                                               Weighted-
                                                                Average
                                                   Weighted-   Remaining
                                        Number      Average   Contractual
                                          of       Exercise      Life
      Range of Exercise Prices          Shares       Price    (in Years)
------------------------------------- ----------- ----------- -----------
<S>                                   <C>         <C>         <C>
         $ 0.10 -- $ 0.50...........     311,076       $0.39        6.25
         $ 0.51 -- $ 1.25...........     199,941       $1.25        7.35
         $ 1.26 -- $ 3.00...........      62,962       $2.49        7.72
         $ 3.01 -- $6.83...........      474,255       $6.31        8.35
         $6.84 -- $13.00...........      461,739      $10.70        9.04
        $13.01 -- $32.75...........      721,693      $29.04        9.32
        $32.76 -- $66.88...........    2,939,503      $49.37        9.82
                                      -----------
           Total....................   5,171,169
                                      ===========
</TABLE>


        At December 31, 1999, approximately 109,000 shares of common stock
outstanding were subject to repurchase by the Company. Common stock
subject to repurchase represents any unvested shares of common stock
held by an optionholder which, upon termination of the optionholder's
employment, may be repurchased by the Company. Such shares are subject
to repurchase at their original issuance price.

         In June 1998, the Board of Directors approved, and the Company
adopted, the 1998 Employee Stock Purchase Plan (the "ESPP"), which is
designed to allow eligible employees of the Company to purchase shares
of common stock at semiannual intervals through periodic payroll
deductions. An aggregate of 700,000 shares of common stock has been
reserved for the ESPP, and 101,163 shares have been issued through
December 31, 1999. The Purchase Plan is implemented in a series of
successive offering periods, each with a maximum duration of 24 months.
Eligible employees can have up to 15% of their base salary deducted that
is to be used to purchase shares of the common stock on specific dates
determined by the Board of Directors (up to a maximum of $25,000 per
year based upon the fair market value of the shares at the beginning
date of the offering). The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value
of the common stock on the commencement date of each offering period or
the specified purchase date.

        The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock plans because, as
discussed below, the alternative fair value accounting provided for
under FAS 123 requires the use of valuation models that were not
developed for use in valuing employee stock instruments. Under APB
Opinion No. 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

        Pro forma information regarding net loss is required under FAS 123
and is calculated as if the Company had accounted for its employee stock
options granted during the years ended December 31, 1999, 1998 and 1997
and for its ESPP shares to be issued under the fair value method of FAS
123. The fair value for employee stock options granted was estimated at
the date of grant based on the Black-Sholes model using the following
weighted average assumptions: risk-free interest rates 6.70%, 5.39%, and
5.75% for 1999, 1998, and 1997, respectively; no dividend yield, a
volatility factor of .80 (no volatility factor of the expected market
price of the Company's common stock for options granted prior to the
Company's initial public offering in August 1998 as the minimum value
method was used); and a weighted average expected life of the option of
five years. The fair value for employee stock purchase plan shares to be
issued was estimated using the following weighted average assumptions:
risk-free interest rate of 6.71 and 5.19% for 1999 and 1998,
respectively, no dividend yield, a volatility factor of .80, and a
weighted average expected life of the shares of six months.

        As discussed above, the valuation models used under FAS 123 were
developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition,
valuation models require the input of highly subjective assumptions,
including the expected life of the option. Because the Company's
employee stock options have characteristics significantly different from
those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
instruments.

        For purposes of pro forma disclosures, the estimated fair value of
the options granted and ESPP shares to be issued is amortized to expense
over their respective vesting periods. Had compensation cost for the
Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent
with the method of FAS 123, the Company's net loss applicable to common
stockholders and net loss per share applicable to common stockholders
would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):


<TABLE>
<CAPTION>
                                           Years Ended December 31,
                                      --------------------------------
                                         1999       1998       1997
                                      ---------- ---------- ----------
<S>                                   <C>        <C>        <C>
 Pro forma net loss applicable to
  common stockholders...............   ($75,321)  ($47,997)  ($22,627)
                                      ========== ========== ==========
 Pro forma basic and diluted net
  loss per share applicable to
  common stockholders...............     ($3.65)    ($5.34)    ($5.28)
                                      ========== ========== ==========
</TABLE>


        The pro forma impact of options granted and ESPP shares to be issued
on the net loss applicable to common stockholders for the years ended
December 31, 1998 and 1997 is not representative of the effects on net
income (loss) for future years, as future years will include the effects
of options vesting as well as the impact of multiple years of stock
option grants.

        The options' weighted average grant date fair value, which is the
value assigned to the options under FAS 123, was $28.31, $3.20, and
$0.41,for options granted during 1999, 1998, and 1997,respectively. The
weighted average grant date fair value of ESPP shares to be issued was
$8.40 and  $7.70 for the year ended December 31, 1999 and 1998.

 Stockholders' Notes Receivable

        In February 1993, the Company issued common stock to a founder in
return for a full recourse note receivable for $12,500. The note bore
interest rate of 7.04% per annum and was paid in 1999.

        During June and December 1995, two officers of the Company were
provided cash advances totaling approximately $81,000 for the purpose of
purchasing the Company's Series A preferred stock. The final payment of
the full recourse notes was paid in 1998.

        In January 1998, the Company issued common stock to an employee in
exchange for a full recourse note receivable for $9,000. The note bears
interest at 5.7% and is payable in three equal annual payments
commencing in January 1999.

12. Income Taxes

        Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the fiscal years
ended December 31, 1999, 1998, and 1997.

The reconciliation of income tax expense (benefit) attributable to net
loss applicable to common stockholders computed at the U.S. federal
statutory rates to income tax expense (benefit) for the fiscal years
ended December 31, 1999, 1998, and 1997 is as follows (in thousands):

<TABLE>
<CAPTION>
                                           Years Ended December 31,
                                      --------------------------------
                                         1999       1998       1997
                                      ---------- ---------- ----------
<S>                                   <C>        <C>        <C>
Tax provision (benefit) at U.S.
  statutory rate...................... ($21,788)  ($16,027)   ($7,667)
Goodwill amortization.................   $1,198       --         --
In-process research and development...   $4,964       --         --
Loss for which no tax benefit is
  currently recognizable..............   15,626      7,898      7,667
Nondeductible preferred stock dividend     --        8,129       --
                                      ---------- ---------- ----------
                                         $  --      $  --      $  --
                                      ========== ========== ==========
</TABLE>


        Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets as
of December 31, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                                 ---------------------
                                                    1999       1998
                                                 ---------- ----------
<S>                                              <C>        <C>
   Deferred Tax Assets:
    Net operating loss carryforwards............   $18,700    $18,448
    Tax credit carryforwards....................     2,200      1,956
    Capitalized research and development........     1,020      1,776
    Deferred warrant expense...................     13,970      --
    Deferred revenue.........................        1,800      --
    Other, net..................................     4,780      2,364
                                                 ---------- ----------
      Total deferred tax assets.................    42,470     24,544

    Deferred Tax Liabilities
   Acquired intangibles........................    (10,998)     --

   Valuation allowance..........................   (31,472)   (24,544)
                                                 ---------- ----------
    Net deferred tax assets                          $  --      $  --
                                                 ========== ==========
</TABLE>


        Realization of deferred tax assets is dependent on future earnings,
if any, the timing and the amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax asset as
of December 31, 1999 and 1998, has been established to reflect these
uncertainties. The change in the valuation allowance was a net increase
of approximately $6,928,000, $8,159,000, $10,329,000 and for the years
ended December 31, 1999, 1998, and 1997, respectively.

        As of December 31, 1999, the Company had federal and California net
operating loss carryforwards of approximately $52,200,000 and
$22,500,000, respectively. The Company also had federal and California
research and development tax credit carryforwards of approximately
$1,325,000 and $1,056,000, respectively. The net operating loss and
credit carryforwards will expire at various dates beginning in the years
2000 through 2019, if not utilized.

        Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
full utilization.

13. Segments of an Enterprise and Related Information

        The Company operates in one business segment, the sale of broadband
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.

        Four of the Company's customers, Shaw Communications, Inc., Rogers
Cable Inc., United Pan-Europe Communications and Sumitomo Corporation,
accounted for 24%, 17%, 14% and 11%, respectively, of total revenues for
the year ended December 31, 1999. Three of the Company's customers, Shaw
Communications, Inc., Cablevision Systems Corporation and Sumitomo
Corporation accounted for 40%, 16% and 14%, respectively, of total
revenues for the year ended December 31, 1998. No other customer
accounted for more than 10% of revenues during these years.

        Total net export revenues to regions outside of the United States
were approximately $81,411,000 and $23,383,000 for the years ended
December 31, 1999 and 1998, respectively. Revenues by geographic region
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                                 ---------------------
                                                    1999       1998
                                                 ---------- ----------
<S>                                              <C>        <C>
Revenues:
  United States.................................   $15,598     $8,313
  Canada........................................    41,008     13,032
  Europe and Israel.............................    24,746      4,387
  Asia..........................................    12,755      4,614
  South America.................................     2,902      1,350
                                                 ---------- ----------
    Total revenues..............................   $97,009    $31,696
                                                 ========== ==========
</TABLE>


14. 401(k) Profit Sharing Plan and Trust

        During 1995, the Company adopted a 401(k) Profit Sharing Plan and
Trust that allows eligible employees to make contributions subject to
certain limitations. The Company may make discretionary contributions
based on profitability as determined by the Board of Directors. No
amount was contributed by the Company to the plan during the years ended
December 31, 1999, 1998, and 1997.

15. Related Party Transactions

        During the year ended December 31, 1997, the Company recognized
revenue of approximately $617,000 in connection with product shipments
made to Sumitomo Corporation, a significant stockholder in the Company
as of December 31, 1997. During the year ended December 31, 1998,
Sumitomo Corporation's ownership interest was diluted as a result of
subsequent Company financings, including the Company's initial public
offering, and Sumitomo is no longer considered a related party. Accounts
receivable from Sumitomo Corporation totaled approximately $362,000 at
December 31, 1997.

        During the year ended December 31, 1998, the Company recognized
revenue of $12,546,000 in connection with product shipments made to Shaw
Communications, Inc., a significant stockholder (see Note 11) with a
position on the Company's Board of Directors as of December 31, 1998.
Accounts receivable from Shaw Communications, Inc. totaled approximately
$1,549,000 at December 31, 1998.

        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.  Under the terms of the Supply Agreement, Rogers retains
the right to return to the Company all product purchased until certain
conditions are met by the Company.  Accordingly, the Company does not
recognize revenue on shipments to Rogers until the milestones have been
achieved or Rogers has waived the right to return the product.  For the
year ended December 31, 1999, Rogers waived their right to return
certain product purchased and the Company recognized approximately
$17,100,000 in revenues from sales to Rogers. The Company also had
deferred revenues from Rogers of approximately $4,500,000 at December
31, 1999.  Subsequent to year end Rogers waived all remaining rights of
return under the Supply Agreement; accordingly, the only rights of
return available to Rogers are those provided under Terayon's standard
warranty policy.

        The Supply Agreement and the Development Agreement (see Note 11) 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.

        During the year ended December 31, 1999, the Company recognized
revenue of $39,664,000 in connection with product shipments made to Shaw
and Rogers, significant shareholders (see Note 11) with positions on the
Company's Board of Directors as of December 31, 1999.  Accounts
receivable from these parties totaled approximately $7,281,000 at
December 31, 1999.

        During the year ended December 31, 1999, the Company incurred
approximately $200,000 of expense related to consulting services
performed by a member of the Company's Board of Directors.

16.  Business Combinations

Imedia Corporation

        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. The Imedia acquisition was completed on September 16, 1999 (the
"Closing Date").

        In accordance with the Agreement, the shareholders, vested
optionholders and warrantholders are entitled to receive shares of the
Company's common stock in varying amounts in a series of up to three
stock payments, the last of which will occur on or before the 18-month
anniversary of the Closing Date.  The aggregate number of shares of the
Company's common stock issued under the Agreement will depend, among
other things, on the performance of the Company's common stock over the
period during which the payments are to be made.  In no event, shall the
number of shares issued exceed 3,000,000 shares, adjusted for any
splits, combinations, stock dividends and the like.  The Agreement also
provides for the payment by the Company of certain Additional
Consideration in the form of cash or additional shares of the Company's
common stock in the event that certain pricing conditions are not
satisfied.   The total value of the consideration that will ultimately
be paid, as measured by certain valuation formulae and based upon an
average of the price of the Company's common stock as reported on the
Nasdaq National Market, is not to exceed $99,000,000 nor be less than
$69,000,000.  The holders of unvested Imedia options also will receive
options to purchase the Company's common stock, the fair value of which
will be included in the purchase price. The Company issued 827,407
shares of common stock and 172,477 options and warrants to purchase
common stock to the vested optionholders and warrantholders of Imedia on
the Closing Date.  In addition, the unvested optionholders of Imedia
options also received options to purchase the Company's common stock,
the fair value of which was included in the purchase price.   Subsequent
to year end, the valuation formulae specified in the Agreement were
satisfied, and, accordingly, the Company's obligation to issue
additional common stock or options and warrants to purchase common stock
beyond those issued at the Closing Date was eliminated.  As a result, no
additional consideration will be issued in the future to the former
stockholders, optionholders and warrantholders of Imedia.

        The acquisition was accounted for under the purchase method of
accounting.  The purchase price was allocated to the assets acquired and
liabilities assumed based on a determination from an independent
appraisal of their respective fair values. The approximate purchase
based upon the valuation formulae was determined as $99,000,000. The
consolidation of the assets and liabilities significantly affected the
Company's balance sheet at December 31, 1999, as depicted in the
following tables:

Approximate purchase price (in thousands):


    <TABLE>

    <S>                                                   <C>
    Approximate purchase price (in thousands):
    Purchase price........................................     $106,347
    Estimated transaction and other direct costs..........        2,631
                                                          --------------
                                                               $108,978
                                                          ==============

    </TABLE>


Purchase price allocation:


    <TABLE>

    <S>                                 <C>
    Purchase price allocation:
    Historical net tangible assets of
       Imedia at September 16, 1999.....   ($355)
    Forgiveness of Imedia note payable..   1,000
                                        ----------
                                            $645

    <CAPTION>

                                                           Amortization
                                                   Life   of Intangibles
                                                 -----------------------
    <S>                                 <C>      <C>      <C>
    Intangible assets acquired:
    Developed technology................  27,000  6 years         4,500
    Assembled workforce.................   2,500     2            1,250
    Trademark...........................   4,000     6              667
    In-process research and development.  11,000    --
    Goodwill............................  63,833     6           10,639
                                        ----------
                                        $108,978
                                        ==========

    </TABLE>


        Tangible assets of Imedia principally include cash, accounts
receivable and property and equipment.  Liabilities principally include
accounts payable and accrued liabilities.  At the Closing Date, the
Company forgave Imedia's note payable obligation of $1,000,000.

        To determine the value of the developed technology, the expected
future cash flow attributed to all existing technology was discounted,
taking into account risks related to the characteristics and application
of the technology, existing and future markets and assessments of the
life cycle stage of the technology.  The analysis resulted in a
valuation of approximately $27,000,000 for developed technology that had
reached technological feasibility and therefore was capitalizable. The
developed technology is being amortized on a straight-line basis over a
six year period.

        The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting and hiring
costs and training costs for each category of employee.  The analysis
yielded a valuation of approximately $2,500,000 for the assembled
workforce.  The asset is being amortized on a straight line basis over a
two year period. The goodwill allocation is approximately $63,833,000.

        The value of the in-process research and development was determined
based on the expected cash flow attributed to the in-process projects,
taking into account revenue that is attributable to previously developed
technology, the level of effort to date in the in-process research and
development, the percentage of completion of the project and the level
of risk associated with the in-process technology. The projects
identified as in-process are those that were underway at Imedia at the
time of the acquisition and will, after the Closing Date, require
additional effort in order to establish technological feasibility.
These projects have identifiable technological risk factors that
indicate that even though successful completion is expected, it is not
assured.  The value of the in-process research and development was
determined as approximately $11,000,000.

        In-process technology acquired consists primarily of major additions
to Imedia's core technology, which is related to Imedia's planned
development of new features.  The majority of the intended functionality
of these new features is not supported by Imedia's current technology.
Intended new features include offering high quality video service over
the Internet and multiplexing data with video.  The Company expects that
in-process technology will be successfully developed and that initial
benefits from these projects will begin in calendar 2001.
Notwithstanding the Company's expectations, there remain significant
technical challenges that must be resolved in order to complete the in-
process technology.

Radwiz Ltd.

        In October 1999, the Company entered into a Share Purchase Agreement
to acquire Radwiz Ltd., an Israeli company.  Radwiz produces
communication access systems based on high-speed IP routing, integrated
with telephony.  Radwiz's systems include both central office Digital
Subscriber Line Access Multiplexers (DSLAMs) and customer premises
equipment for small office, home office (SOHO) business broadband
services.   The Radwiz acquisition was completed on November 22, 1999.

        In accordance with the Agreement, the shareholders and vested
optionholders received cash and shares of the Company's common stock and
options to purchase shares of the Company's common stock. The aggregate
number of shares of the Company's common stock to be issued under the
Radwiz Agreement will depend, among other things, on the performance of
the Company's common stock over the period between the closing of the
merger and the twelve month anniversary. The Company paid $250,000 in
cash and issued 873,582 shares of Terayon common stock to the former
shareholders of Radwiz and issued options to purchase 72,571 shares of
Terayon common stock to the vested optionholders of Radwiz on the
Closing Date. In addition, the unvested optionholders of Radwiz options
also received options to purchase the Company's common stock, the fair
value of which was included in the purchase price.

        The purchase price was allocated to the assets acquired and
liabilities assumed based on a determination from an independent
appraisal of their respective values. The approximate purchase price was
determined to be $52,700,000. This represents the minimum purchase
price, as specified in the Agreement, to be issued to the shareholders
and vested optionholders of Radwiz ($50,000,000,) plus the value of the
options issued to unvested optionholders of Radwiz ($2,700,000) based on
the market value of the Company's common stock on the date the
acquisition was announced. Proceeds to be received from the Radwiz
optionholders upon exercise of their options are not significant.  The
consolidation of the assets and liabilities significantly affected the
Company's balance sheet at December 31, 1999, as depicted in the
following tables.


Approximate purchase price (in thousands):

    <TABLE>

    <S>                                                   <C>
    Approximate purchase price (in thousands):
    Purchase price........................................      $52,667
    Estimated transaction and other direct costs..........          902
                                                          --------------
                                                                $53,569
                                                          ==============

    </TABLE>

Purchase price allocation:


    <TABLE>

    <S>                                 <C>
    Purchase price allocation:

    Historical net tangible assets of
      Radwiz at November 22, 1999.......  $3,058

    <CAPTION>


                                                           Amortization
                                                   Life   of Intangibles
                                                 -----------------------
    <S>                                 <C>      <C>      <C>
    Intangible assets acquired:
    Developed technology................  29,850  6 years         4,975
    Assembled workforce.................   2,800     2            1,400
    Trademark...........................   1,150     6              192
    In-process research and development.   3,600    --
    Goodwill............................  24,109     6            4,018
    Deferred tax liability.............. (10,998)
                                        ----------
                                         $53,569
                                        ==========

    </TABLE>


        Tangible assets of Radwiz principally include cash, accounts
receivable, inventory and property and equipment. Liabilities
principally include accounts payable and accrued liabilities.

        To determine the value of the developed technology, the expected
future cash flow attributed to all existing technology was discounted,
taking into account risks related to the characteristics and
applications of the technology, existing and future markets, and
assessments of the life cycle stage of technology. The analysis resulted
in a valuation of approximately $29,850,000 for developed technology
that had reached technological feasibility and therefore was
capitalizable. The developed technology is being amortized on a straight
line basis over a six year period.

        The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting and hiring
costs and training costs for each category of employee. The analysis
yielded a valuation of approximately $2,800,000 for the assembled
workforce. The asset is being amortized on a straight-line basis over a
two year period.

        The goodwill allocation is approximately $24,100,000.

        The value of the in-process research and development was determined
based on the expected cash flow attributed to the in-process projects,
taking into account revenue that is attributable to previously developed
technology, the level of effort to date in the in-process research and
development, the percentage of completion of the project and the level
of risk associated with the in-process technology. The projects
identified as in process at Radwiz are those that will be underway at
the time of the acquisition of Radwiz and would, after consummation of
the acquisition, require additional effort to establish technological
feasibility. These projects have identifiable technological risk factors
that indicate that even though successful completion is expected, it is
not assured. The value of the in-process research and development was
determined as approximately $3,600,000. In-process technology acquired
in the transaction consists primarily of additions to Radwiz's core
technology, which is related to Radwiz's planned development of new
features. The majority of the intended functionality of these new
features is not supported by Radwiz's current technology. Intended new
features include offering: end-to-end carrier quality of service;
allowing access via an ATM network; and, providing ISDN line
functionality.

        The Company expects that the in-process technology will be
successfully developed, and that initial benefits from these projects
will begin in calendar 2000. Notwithstanding the Company's expectation
that the in-process technology will be successfully developed, there
remain significant technical challenges that must be resolved in order
to complete the in- process technology.

        The following selected unaudited pro forma combined results of
operations of the Company, Imedia and Radwiz for the year ended December
31, 1999 and 1998 have been prepared assuming that the acquisitions
occurred at the beginning of the period presented.  The following
selected unaudited pro forma financial information is not necessarily
indicative of the results that would have occurred had the acquisition
been completed at the beginning of the period indicated nor is it
indicative of future operating results (in thousands, except per share
data):

    <TABLE>
    <CAPTION>
                                                 Year Ended December 31,
                                                 -----------------------
                                                   1999        1998
                                                 -----------------------
    <S>                                          <C>      <C>

    Revenues.....................................$102,280       $34,754
    Net loss applicable to common stockholders...($75,422)     ($59,796)
    Net loss per share applicable to common
      stockholders...............................  ($2.92)       ($5.60)
    Shares used in calculation of net loss per
      share applicable to common stockholders....  25,832        10,687

    </TABLE>


        The net loss applicable to common stockholders and net loss per share
applicable to common stockholders in 1999 does not include the in-
process research and development charges of approximately $11,000,000
and $3,600,000 for Imedia and Radwiz, respectively.


17.  Subsequent Events (Unaudited)

        In October 1999, the Company entered into a Share Purchase Agreement
(the "Telegate Agreement") to acquire Telegate Ltd, an Israeli company.
Telegate produces telephony and data access platforms that are deployed
by service providers to deliver efficient carrier-class voice services
over cable. Telegate also provides in-home networking capability for
telephony and data, based on the Digital Enhanced Cordless Telephony
(DECT) standard.   In general, the Telegate shareholders and vested
optionholders will receive a total of 2,200,000 shares and options to
purchase shares of the Company's common stock and a cash payment equal
to Telegate's net cash balance at closing minus $2,000,000. The total
purchase price is estimated to be approximately $144,950,000.  The
transaction was completed on January 2, 2000.  We expect to account for
the acquisition as a purchase transaction.

        The following selected unaudited pro forma combined results of
operations of the Company, Imedia, Radwiz and Telegate for the year
ended December 31, 1999 and 1998 have been prepared assuming that the
acquisitions occurred at the beginning of the period presented.  The
following selected unaudited pro forma financial information is not
necessarily indicative of the results that would have occurred had the
acquisition been completed at the beginning of the period indicated nor
is it indicative of future operating results (in thousands, except per
share data):

    <TABLE>
    <CAPTION>
                                                 Year Ended December 31,
                                                 -----------------------
                                                   1999        1998
                                                 -----------------------
    <S>                                          <C>      <C>

    Revenues.....................................$111,424       $38,323
    Net loss applicable to common stockholders...($84,696)     ($65,806)
    Net loss per share applicable to common
      stockholders...............................  ($3.02)       ($5.11)
    Shares used in calculation of net loss per
      share applicable to common stockholders....  28,032        12,887

    </TABLE>


The net loss applicable to common stockholders and net loss per share
applicable to common stockholders in 1999 does not include the in-
process research and development charges of approximately $11,000,000
and $3,600,000 for Imedia and Radwiz, respectfully.

        In February 2000, the Company entered into an Asset Purchase
Agreement (the "ANE Agreement") to acquire certain assets and assume
certain liabilities of the Access Network Electronics Division (ANE) of
Tyco Electronics Corporation, a subsidiary of Tyco International Ltd.
ANE produces DSL (Digital Subscriber Line) systems that provide multiple
phone lines over the existing copper telephony network. In general, we
will issue shares of our common stock at closing valued at approximately
$85,000,000 based on the volume weighted average of the per share sales
price of the Company's common stock as reported on the Nasdaq National
Market for the ten consecutive trading days prior to the closing date.
In addition, the Company has agreed to establish an employee retention
program for purposes of retaining the certain identified employees of
ANE.  The retention program provides for up to 3 annual payments to the
identified employees in a total amount of approximately $4,500,000
provided the employees remain employed by the Company. The retention
payments will be charged to expense over the employees' respective
periods of service. The transaction is subject to customary closing
conditions and is expected to close in the second quarter of 2000.  We
expect to account for the acquisition as a purchase transaction.

        In February 2000, the Company also entered into a Share Purchase
Agreement (the "Combox Agreement") to acquire Combox Ltd ("Combox"), an
Israeli company.  Combox is a manufacturer of broadband data systems and
satellite communications based on international standards.  Combox's
cable data access systems conform to the growing EuroModem international
specification, based on the Digital Video Broadcasting (DVB) standard.
In general, the Combox shareholders will receive a total of 775,000
shares of the Company's common stock.  The total purchase price is
estimated to be approximately $92,000,000 based on the fair market value
of the Company's common stock on the days immediately preceding and
following the date the acquisition was announced. In addition, the
Company will issue options to purchase common stock of the Company to
the vested and unvested optionholders of Combox options.  The
transaction is subject to customary closing conditions and is expected
to close in the second quarter of 2000.  We expect to account for the
acquisition as a purchase transaction.

        In February 2000, the Company's board of directors approved a two-
for-one split of the Company's outstanding shares of common stock to be
effected in the form of a stock dividend.  The stock split is pending
stockholder approval of an increase in the Company's authorized shares
and therefore the changes in the capital structure resulting from the
split have not been given retroactive effect in the Company's
consolidated financial statements as of December 31, 1999.

        In March 2000, the Company and Telegate, now a subsidiary of the
Company, entered into an Asset Purchase Agreement ("Internet Telecom
Agreement") under which Telegate agreed to purchase certain assets of
Internet Telecom Ltd. ("Internet Telecom"), an Israeli company.
Internet Telecom is a supplier of PacketCable and other standards-based,
voice-over-IP ("Internet Protocol") systems and technologies.   In
general, Telegate will acquire the assets of Internet Telecom in
exchange for shares of the Company sock valued at approximately $44.0
million based on the fair market value of the Company's stock on the
days immediately preceding and following the announcement of the
acquisition and a cash payment estimated at approximately $2,000,000.
The transaction is subject to customary closing conditions and is
expected to close in the second quarter.  We expect to account for the
transaction as a purchase transaction.

        In March 2000, Rogers Communications purchased 1,843,109 shares of
the Company's common stock.  The stock was purchased pursuant to two
warrants to purchase common stock issued to Rogers Communications in
connection with the Product Development Assistance Agreement (note 10).
The shares were purchased on a net exercise basis and resulted in no
proceeds to the Company.

        In March 2000, the Company entered into a Share Purchase Agreement
to acquire Ultracom Ltd. ("Ultracom"), an Israeli company. Ultracom is a
supplier of broadband systems-on-silicon.  In general the Ultracom
shareholders and vested optionholders will receive shares and option of
the Company's tock valued at approximately $30,000,000 based on the
closing price of the Company's common stock as reported by Nasdaq on the
fifth business day prior to the Closing and a cash payment estimated at
approximately $2,300,000.  The Company will also assume the unvested
Ultracom options, the value of which will be included in the purchase
price.  The transaction is subject to customary closing conditions and
is expected to close in the second quarter.  We expect to account for
the transaction as a purchase transaction.

<PAGE>

PART III

ITEM 10.  Directors and Officers of the Registrant

Our directors and executive officers and their ages as of March
10, 2000 are as follows:

    <TABLE>
    <CAPTION>


                Name                    Age        Position
    -----------------------------  ------------- ------------
    <S>                            <C>           <C>


     Dr. Zaki Rakib(2).............          41  Chief Executive Officer
     Shlomo Rakib..................          43  Chairman of the Board
                                                 Chief Technical Officer
     Dennis J. Picker..............          52  Chief Operating Officer
     Ray M. Fritz..................          54  Chief Financial Officer

     Michael D'Avella.............           41  Director
     Alek Krstajic................           36  Director
     Christopher Schaepe..(1)(2)..           36  Director
     Lewis Solomon..(1)...........           66  Director
     Mark Stevens..(2)............           40  Director


    </TABLE>


(1)     Member of Audit Committee

(2)     Member of Compensation Committee

The Board of Directors is divided into three classes, each having
a three-year term.  Mr. Krstjic, Mr. Solomon and Mr. Stevens are Class
I directors, whose terms expire in 2002.  Mr. D'Avella and Mr. Shlomo
Rakib are Class II directors, whose terms expire in 2000.   Mr. Schaepe
and Dr. Zaki Rakib are Class III directors, whose terms expire in 2001.

Zaki Rakib co-founded Terayon in 1993 and has served as Chief
Executive Officer since January 1993 and as a director since February
1995.  From January 1993 to July 1998, Dr. Rakib also served as Chief
Financial Officer of the Company.  Prior to co-founding the Company,
Dr. Rakib served as Director of Engineering for Cadence Design Systems,
an electronic design automation software company, from 1990 to 1994.
Prior to joining Cadence, Dr. Rakib was Vice President of Engineering
at Helios Software, which was acquired by Cadence in 1990.  Dr. Rakib
serves on the board of a privately held company.  Dr. Rakib holds B.S.,
M.S. and Ph.D. degrees in engineering from Ben-Gurion University in
Israel.  Dr. Rakib is the brother of Shlomo Rakib, the Company's
Chairman of the Board, President and Chief Technical Officer and a
director of the Company.

Shlomo Rakib co-founded Terayon in 1993 and has served as
Chairman of the Board and President since January 1993 and as Chief
Technical Officer since February 1995.  Prior to co-founding the
Company, Mr. Rakib served as Chief Engineer at PhaseCom, Inc., a
communications products company, from 1981 to 1993, where he pioneered
the development of data and telephony applications over cable.
Mr. Rakib is the inventor of several patented technologies in the area
of data and telephony applications over cable.  Mr. Rakib holds a
B.S.E.E. degree from Technion University in Israel.  Mr. Rakib is the
brother of Zaki Rakib, the Chief Executive Officer and a director of
the Company.

Dennis J. Picker has served as Chief Operating Officer since
February 1998 and served as Vice President from October 1997 to
February 1998 and Vice President, Engineering from May 1996 to October
1997.  From 1994 to April 1996, Mr. Picker was Director of the Cable
Data Products Business Unit of Motorola, Inc., an electronics company.
Mr. Picker holds a B.S. degree in electrical engineering from the
University of Pennsylvania and a M.S. degree in electrical engineering
from Northwestern University.

Ray M. Fritz has served as the Company's Chief Financial Officer
since July 1999.  Prior to joining the Company, Mr. Fritz was Vice
President of Finance and Operations and Chief Financial Officer of
GigaLabs Inc., a provider of high performance input/output switching
solutions, from December 1997 to July 1999.  From August 1994 until
August 1997, Mr. Fritz was with Clarify, Inc., a provider of front
office automation systems, as its Vice President, Finance and
Operations and Chief Financial Officer.  From May 1990 to August 1994,
he served as Director, Finance of Synopsys, Inc., an electronic design
automation company, and from April 1986 to May 1990, Mr. Fritz served
as Vice President and Controller of LSI Logic Corporation, a
semiconductor company.  Prior to that, he held a variety of finance
positions with Xerox Corporation, The Singer Company and Shell Oil
Company.  Mr. Fritz holds a B.S. degree in finance/business
administration from Benedictine College, a M.B.A. degree from Atlanta
University and a M.S. degree in tax from Golden Gate University.

Michael D'Avella has served as a director of the Company since
April 1998.  Mr. D'Avella is the Senior Vice President, Planning for
Shaw Communications Inc., a diversified communications company and a
leading cable operator in Canada.  Mr. D'Avella has held a variety of
senior management positions at Shaw since 1991.  Prior to that, he held
positions with the Canadian Cable Television Association and Telesat
Canada.  He is a director of Canadian Satellite Communications Inc., a
distributor of satellite based broadcast signals and provider of
satellite communications for businesses, and GT Group Telecom Inc., a
broadband services company, and several privately held companies.
Mr. D'Avella holds a B.A. degree in economics and planning from the
University of Toronto in Canada.

Alek Krstajic has served as a director of the Company since July
1999.  Mr. Krstajic is the Senior Vice President Interactive Services,
Sales and Product Development for Rogers Cable Inc., and has
held a variety of senior management positions at Rogers since  1994.
Mr. Krstajic is a director of several privately held companies.  Mr. Krstajic
holds a B.A. degree in economics from the University of Toronto in
Canada and attended the executive educational program at Wharton School
of Business at the University of Pennsylvania.

Christopher J. Schaepe has served as a director of the Company
since March 1995.  Mr. Schaepe is a Managing Director of Weiss, Peck &
Greer, L.L.C., a technology-focused venture capital firm, which he
joined in 1991.  Previously, Mr. Schaepe served in corporate finance
and capital markets roles for three years at Goldman, Sachs & Company
after his employment as a software engineer at IBM Corporation.  He is
a director of Galileo Technology Ltd., a communications semiconductor
company, Quantum Effect Devices, Inc., a communications microprocessor
supplier, and several privately held companies.  Mr. Schaepe holds B.S.
and M.S. degrees in computer science from the Massachusetts Institute
of Technology and an M.B.A. degree from Stanford Business School.

Lewis Solomon has served as a director of the Company since March
1995.  Mr. Solomon has been a principal of G&L Investments, a
consulting firm, since 1989 and currently serves as the Co-Chairman of
the Board of Broadband Services, Inc.  From 1983 to 1988, he served as
Executive Vice President at Alan Patricof Associates, a venture capital
firm focused on high technology, biotechnology and communications
industries.  Prior to that, Mr. Solomon served in various capacities
with General Instrument Corp., most recently as Senior Vice President.
From April 1986 to January 1997, he served as Chairman of the Board of
Cybernetic Services, Inc., an LED systems manufacturer, which commenced
a Chapter 7 bankruptcy proceeding in April 1997.  Mr. Solomon serves on
the boards of Anadigics, Inc., a manufacturer of integrated circuits;
Anacomp, Inc., a manufacturer of data storage systems; and Artesyn
Technologies, Inc., a power supply and power converter supply company.
Mr. Solomon also serves on the boards of several privately held
companies.

Mark A. Stevens has served as a director of the Company since
March 1995.  Mr. Stevens has been a General Partner of Sequoia Capital,
a venture capital investment fund, since March 1993.  Mr. Stevens
currently serves on the Board of Directors of NVidia Corporation, a
graphics software and processor company, Medicalogic, Inc., an on-line
health enterprise company, MP3.com, Inc., an on-line music services
provider and retail company and several privately held companies.
Prior to joining Sequoia in 1989, he held technical sales and marketing
positions at Intel Corporation.  Mr. Stevens holds a B.S.E.E. degree, a
B.A. degree in economics and an M.S. degree in computer engineering
from the University of Southern California and an M.B.A. degree from
Harvard Business School.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16(a)"), requires the Company's directors and executive
officers, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file with the SEC initial
reports of ownership and report of changes in ownership of common stock
and other equity securities of the Company.  Officers, directors and
greater than 10 percent stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies
of such reports furnished to the Company and written representations
that no other reports were required, during the fiscal year ended
December 31, 1999, all Section 16(a) filing requirements applicable to
its directors, officers and greater than 10 percent beneficial owners
were complied with except that Mr. Schaepe and Mr. Krstajic each filed
late one report covering one transaction.

ITEM 11. Executive Compensation

Compensation of Directors

Mr. Solomon receives $2,000 per month for his service as a member
of the Board of Directors and Mr. D'Avella receives $3,000 per month
for his services as a member of the Board of Directors.  No other
director of the Company receives cash for services provided as a
director.  Certain directors have been granted options to purchase
Common Stock in the past. In the fiscal year ended December 31, 1998,
the total compensation paid to non-employee directors was $48,000.  The
members of the Board of Directors are also eligible for reimbursement
for their expenses incurred in connection with attendance at Board of
Directors and Committee meetings in accordance with Company policy.

Each non-employee director of the Company also receives non-
discretionary automatic stock option grants under the Directors' Plan.
Only non-employee directors of the Company who are not employees of or
consultants to the Company or of any affiliate of the Company (a "Non-
Employee Director") are eligible to receive options under the
Directors' Plan.  Options granted under the Directors' Plan are
intended by the Company not to qualify as incentive stock options under
the Code.  The Directors' Plan is administered by the Board, unless the
Board delegates administration to a Committee comprised of members of
the Board.

The aggregate number of shares of Common Stock that may be issued
pursuant to options granted under the Directors' Plan is 200,000
shares.  Pursuant to the terms of the Directors' Plan, after August
1998, each person who is elected or appointed for the first time to be
a Non-Employee Director automatically shall, upon the date of his or
her initial election or appointment to be a Non-Employee Director by
the Board or stockholders of the Company, be granted an option to
purchase 30,000 shares of Common Stock.  In addition, on the day
following each Annual Meeting of Stockholders of the Company ("Annual
Meeting"), commencing with the Annual Meeting in 1999, each person who
is then serving as a Non-Employee Director automatically shall be
granted an option to purchase 12,500 shares of Common Stock, which
amount shall be prorated for any Non-Employee Director who has not
continuously served as a Non-Employee Director for the 12-month period
prior to the date of such Annual Meeting.  In addition, on the day
following each Annual Meeting, commencing with the Annual Meeting in
1999, each Non-Employee Director who is then serving as a member of a
committee of the Board of Directors automatically shall be granted, for
each such committee, an option to purchase 3,000 shares of Common Stock
of the Company, which amount shall be prorated for any Non-Employee
Director who has not continuously served as a member of such committee
for the 12-month period prior to the date of such Annual Meeting.

The exercise price of the options granted under the Directors'
Plan will be equal to the fair market value of the Common Stock on the
date of grant.  No option granted under the Directors' Plan may be
exercised after the expiration of 10 years from the date it was
granted.  Options granted under the Directors' Plan vest and become
exercisable as to 33% of the shares on the first anniversary of the
date of grant and 1/36th of the shares monthly thereafter.  Options
granted under the Directors' Plan generally are non-transferable.
However, an optionee may designate a beneficiary who may exercise the
option following the optionee's death.  An optionee whose service
relationship with the Company or any affiliate (whether as a Non-
Employee Director of the Company or subsequently as an employee,
director, or consultant of either the Company or an affiliate) ceases
for any reason may exercise vested options for the term provided in the
option agreement (3 months generally, 12 months in the event of
disability and 18 months in the event of death).

In the event of certain changes in control of the Company, all
outstanding awards under the Directors' Plan either will be assumed or
substituted for by any surviving entity.  If the surviving entity
determines not to assume or substitute for such awards, the vesting and
time during which such options may be exercised shall be accelerated
prior to such event and the options will terminate if not exercised
after such acceleration and at or prior to such event.  Unless
terminated sooner by the Board of Directors, the Directors' Plan will
terminate in June 2008.

During the last fiscal year, the Company granted options covering
46,500, 25,000  and 30,000 shares to non-employee directors of the
Company at exercise prices per share of $45.25, $42.52 and $48.50,
respectively. The exercise prices were also the respective fair market
values of such Common Stock on the date of grant (based on the closing
sale price reported on the Nasdaq National Market for the date of
grant). As of March 10, 2000, no options had been exercised under the
Directors' Plan.

Directors who are employees of the Company do not receive
separate compensation for their services as directors.

Compensation of Executive Officers

Summary of Compensation

The following table shows for the fiscal years ended December 31,
1999, 1998 and 1997, compensation awarded or paid to, or earned by, the
Company's Chief Executive Officer and its other four most highly
compensated executive officers at December 31, 1999 (the "Named
Executive Officers"):

    <TABLE>
    <CAPTION>

                     Annual Compensation  Long-term Compensation Awards
                     -------------------------------------------------------
                                            Other  Securities
        Name and                           Annual  Underlying LTIP All Other
        Principal          Salary   Bonus Compensa- Options/ PayoutCompensa-
        Position     Year    ($)     ($)   tion($)  SARs (#)  ($)  tion ($)
    ------------------------------------------------------------------------
    <S>              <C>  <C>      <C>    <C>      <C>       <C>   <C>

    Dr. Zaki Rakib   1999  232,500 66,000     --       --        --    --
    Chief Executive  1998  172,500     --     --       --        --    --
    Officer          1997  150,000 12,500     --       --        --    --

    Shlomo Rakib     1999  232,500 45,000     --       --        --    --
    President and    1998  172,500     --     --       --        --    --
    Chief Technical  1997  150,000 12,500     --       --        --    --
    Officer

    Dennis Picker    1999  181,250 40,000     --      10,000     --    --
    Chief Operating  1998  153,000     --     --      40,000     --    --
    Officer          1997  129,000 31,800 75,166(1)    --        --    --

    Ray M. Fritz     1999  175,416 43,333     --      20,000     --    --
    Chief Financial  1998   74,079     --     --     180,000     --    --
    Officer          1997     --       --     --       --        --    --

    Brian Bentley    1999   99,192     -- 84,574(2)    --        --    --
    Vice President   1998  125,650     -- 93,974(2)   10,000     --    --
    Worldwide Sales(31997     --       --     --       --        --    --

    </TABLE>

(1)     Consists of reimbursement to Mr. Picker for travel costs of which
$35,140 was attributable to tax gross-up payments made by the
Company.

(2)     Represents sales commissions earned in 1998 and 1999.

(3)     Mr. Bentley is no longer an employee of the Company.

Stock Option Grants And Exercises

The Company grants options to its executive officers under its
1995 Stock Option Plan (the "1995 Plan") and its 1997 Equity Incentive
Plan (the "1997 Plan," together with the 1995 Plan, the "Plans").  As
of March 10, 2000, options to purchase a total of 386,182 shares and
2,902,502 shares were outstanding under the 1995 Plan and the 1997
Plan, respectively, and options to purchase 181,186 shares and 880,990
shares remained available for grant under the 1995 Plan and the 1997
Plan, respectively.

The following tables show for the fiscal year ended December 31,
1999, certain information regarding options granted to, exercised by,
and held at year-end by, the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR


    <TABLE>
    <CAPTION>

                 Individual Grants                     Potential
                 --------------------------------------Realizable Value
                 Number of % of Total                  at Assumed Annual
                 Securities Options                    Rates of Stock Price
                 UnderlyingGranted toExercise          Appreciation
                  Options  Employees  or Base  Expira-   for Option Term (4)
                  Granted  in Fiscal   Price    tion   ---------------------
    Name          (#) (1)   Year (2) ($/Sh)(3)  Date   5% ($)    10% ($)
    ---------------------------------------------------------------------
    <S>          <C>       <C>       <C>      <C>      <C>

    Dr.Zaki Rakib    --        --       --       --        --

    Shlomo Rakib     --        --       --       --        --

    Dennis Picker   10,000      0.25%  37.375 04/04/09   235,049    470,099

    Ray M. Fritz    20,000      0.50%  37.375 04/04/09   595,661  1,171,777

    Brian Bentley    --        --       --       --        --        --

    </TABLE>




(1)     Options vest at a rate 50% on the first anniversary of the
vesting commencement date and 1/24th each month thereafter.  The term
of each option granted is generally the earlier of (i) 10 years or
(ii) 90 days after termination of the optionee's services to the
Company.

(2)     Based on an aggregate of 3,876,448 options granted to employees,
consultants and directors of the Company, including the Named
Executive Officers, during the fiscal year ended December 31, 1999.

(3)     The exercise price per share of each option was equal to the fair
market value of the Common Stock on the date of grant as determined
by the Board of Directors after consideration of a number of
factors, including, but not limited to, the development life cycle
of the Company's products, the Company's financial performance,
market conditions, the preferred rights and privileges of shares of
equity securities sold to or purchased by outside investors, and
third-party appraisals.

(4)     The potential realizable value is calculated based on the terms
of the option at its time of grant (10 years).  It is calculated
assuming that the fair market value of the Company's Common Stock on
the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option is exercised
and sold on the last day of its term for the appreciated stock
price.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

    <TABLE>
    <CAPTION>

                                        Number of    Value of
                                        Securities  Unexercised
                                        Underlying In-the-Money
                                       Unexercised Options/SARS
                                      Options/SARS at FY_End ($)
                   Shares               at FY-End  Exercisable/
    Name         Acquired on   Value  Exercisable/  Unexerciable
                 Exercise(#)Realized($)Unexerciable     (1)
    ------------------------------------------------------------
    <S>          <C>        <C>        <C>         <C>

    Dr.Zaki Rakib    --         --          --          --

    Shlomo Rakib     --         --          --          --

    Dennis Picker   181,699  7,388,851 73,034 (2)     3,971,983

    Ray M. Fritz     10,000    664,063 153,001 (3)    7,532,665

    Brian Bentley    59,786  2,416,173      --          --


    </TABLE>

(1)     Value is based upon the closing price of $62.8125 of the
Company's on December 31, 1999 on the Nasdaq National Market.

(2)     As of December 31, 1999, 133,001 shares of common stock are
currently exercisable upon the early exercise of options vesting
through May 2003 and 20,000 shares are not currently exercisable
under options vesting through April 2001.

(3)     As of December 31, 1999, 28,001 shares are currently
exercisable upon the early exercise of options vesting through May
2001, 35,033 shares of currently exercisable upon the early exercise
of options vesting through May 2003 and 10,000 are not currently
exercisable under options vesting through April 2001.

Employment Agreements

In February 1993, the Company entered into an employment
agreement with Shlomo Rakib to serve as President and Chairman of the
Board of Directors.  The employment agreement is for a specified
duration of seven years, but it is terminable at will or without cause
at any time upon written notice.  In February 1993, the Company also
entered into an employment agreement with Zaki Rakib to serve as Chief
Executive Officer and Chief Financial Officer.  The employment
agreement is not for a specified term and is terminable at will or
without cause at any time upon written notice.  Both employment
agreements further provide that the Company's Board of Directors will
set each executive's salary in accordance with the payroll policies of
the Company as constituted from time to time.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION (2)

The Compensation Committee of the Board of Directors
("Committee") consists of Dr. Zaki Rakib, the Company's Chief Executive
Officer, and Messrs. Schaepe and Stevens are not currently officers nor
employees of the Company.  The Committee is responsible for
establishing the Company's compensation programs for all employees,
including executives.  Dr. Rakib is not present during the discussion
of his compensation.  For executive officers, the Committee evaluates
performance and determines compensation policies and levels.

COMPENSATION PHILOSOPHY

The goals of the compensation program are to align compensation
with business objectives and performance and to enable the Company to
attract, retain and reward executive officers and other key employees
who contribute to the long-term success of the Company and to motivate
them to enhance long-term stockholder value.  Key elements of this
philosophy are:

 *     The Company pays competitively compared to leading
technology companies with which the Company competes for
talent.  To ensure that pay is competitive, the Company
regularly compares its pay practices with these companies
and establishes its pay parameters based on this review.

*       The Company maintains annual incentive opportunities
sufficient to provide motivation to achieve specific
operating goals and to generate rewards that bring total
compensation to competitive levels.

*       The Company provides significant equity-based incentives
for executives and other key employees to ensure that they
are motivated over the long term to respond to the
Company's business challenges and opportunities as owners
and not just as employees.

Philosophy Regarding Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Internal Revenue Code (the "Code") limits the
Company to a deduction for federal income tax purposes of no more than
$1 million of compensation paid to certain Named Executive Officers in
a taxable year.  Compensation above $1 million may be deducted if it is
"performance-based compensation" within the meaning of the Code.

The Compensation Committee has determined that stock options
granted under the Company's 1997 Equity Incentive Plan with an exercise
price at least equal to the fair market value of the Company's common
stock on the date of grant shall be treated as "performance-based
compensation."

Base Salary.  The Committee annually reviews each executive
officer's base salary.  When reviewing base salaries, the Committee
considers individual and corporate performance, levels of
responsibility, prior experience, breadth of knowledge and competitive
pay practices.

Long-Term Incentives.  The Company's long-term incentive program
consists of the 1995 Stock Option Plan, the 1997 Equity Incentive Plan
and the 1999 Non-Officer's Plan.  The option programs utilize vesting
periods (generally five years) to encourage key employees to continue
in the employ of the Company.  Through option grants, executives
receive significant equity incentives to build long-term stockholder
value.  Grants are made at 100% of fair market value on the date of
grant.  Executives receive value from these grants only if the value of
the Company's Common Stock appreciates over the long-term.  The size of
option grants is determined based on competitive practices at leading
companies in the technology industry and the Company's philosophy of
significantly linking executive compensation with stockholder
interests.  In 1999, the Committee granted stock options to particular
executives that will vest over a two-year period.  These grants were
intended to provide incentive to maximize stockholder value over the
next several years.  The Committee believes this approach creates an
appropriate focus on longer term objectives and promotes executive
retention.

CHIEF EXECUTIVE OFFICER COMPENSATION

Dr. Rakib's base salary at the beginning of 1999 Chief Executive
Officer was $172,500.  Following the Committee's review of compensation
paid by leading technology companies, the Committee set Dr. Rakib's
base annual salary through 1999 at $250,000.  In setting this amount,
the Committee took into account (i) its belief that Dr. Rakib is the
Chief Executive Officer of a leading technology company with
significant and broad-based experience in the broadband equipment
industry, (ii) the scope of Dr. Rakib's responsibility, and (iii) the
Board's confidence in Dr. Rakib to lead the Company's continued
development.

OTHER EXECUTIVE OFFICERS' COMPENSATION

In April 1999, the Committee established the base salary ranges
for other executive officers based on data regarding executive
compensation of the Company's competitors, including published survey
information, each executive officer's base salary for prior years, past
performance, the scope of such officer's responsibility and other
information available to the Committee.  In April 1999, the Committee
established bonus compensation formulas for each level of upper
management based on individual and Company-wide performance criteria.
The Committee also awarded stock options to certain executive officers
to provide additional incentives.

        COMPENSATION COMMITTEE
        Dr. Zaki Rakib
        Christopher J. Schaepe
        Mark A. Stevens

Compensation Committee Interlocks and Insider
Participation

Prior to February 1998, the Company did not have a Compensation
Committee of the Board of Directors, and the entire Board participated
in all compensation decisions, except that Messrs. Rakib did not
participate in decisions relating to their respective compensation.  In
February 1998, the Board formed the Company's Compensation Committee to
review and recommend to the Board compensation and benefits for the
Company's executive officers and administer the Company's stock
purchase and stock option plans.  Each of the Company's directors, or
an affiliated entity, holds securities of the Company.  In January
1999, the Compensation Committee created a Non-Officer Stock Option
Committee of the Board of Directors, which consists of Dr. Zaki Rakib.
The function of the Non-Officer Stock Option Committee is to grant
options to purchase shares of common stock to eligible persons who are
not officers of the Company subject to Section 16 of the Securities
Exchange Act of 1934,  as amended.

Performance Measurement Comparison (1)

The following graph shows the total stockholder return of an
investment of $100 in cash on August 17, 1998 for the Company's Common
Stock and an investment of $100 in cash on August 31, 1998 for (i) the
Standards & Poor's 500 Index (the "S&P 500") and (ii) the Nasdaq
Telecommunication Stocks Index (the "Nasdaq Telecom").  All values
assume reinvestment of the full amount of all dividends and are
calculated as of last day of each month:

Comparison of 19 Month Cumulative Total Return on Investment


    <TABLE>
    <CAPTION>
                                    Nasdaq
                  Company  S&P 500  Telecom
                  ---------------------------
    <S>           <C>      <C>      <C>

    August 1998        100      100      100
    September 1998      97      106      113
    October 1998        92      115      123
    November 1998      236      122      130
    December 1998      279      129      155
    January 1999       314      135      179
    February 1999      239      130      179
    March 1999         308      135      194
    April 1999         311      141      204
    May 1999           247      137      207
    June 1999          430      145      206
    July 1999          301      140      201
    August 1999        277      140      192
    September 1999     376      136      191
    October 1999       337      145      226
    November 1999      477      148      235
    December 1999      483      156      271
    January 2000       823      148      274
    February 2000    2,038      146      299

    </TABLE>


(1)  This Section is not "soliciting material," is not deemed "filed"
with the SEC and is not to be incorporated by reference in any filing
of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or
after the date hereof and irrespective of any general incorporation
language in any such filing.


ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of March 10, 2000 by: (i)
all those known by the Company to be beneficial owners of more than
five percent of its Common Stock; (ii) each director; (iii) each of the
executive officers named in the Summary Compensation Table; and (iv)
all current executive officers and directors of the Company as a group.
Unless otherwise noted, the address for the individuals listed below
is: c/o Terayon Communication Systems, Inc., 2952 Bunker Hill Lane,
Santa Clara, California 95054.

    <TABLE>
    <CAPTION>
                                       Beneficial Ownership
                                       ----------------------
                                        Number of  Percent of
    Beneficial Owner                     Shares       Total
    ----------------                   ----------  ----------
    <S>                                <C>         <C>

    Shaw Communications, Inc. (2).....  3,036,159        10.5%
      630 Third Avne., S.W., Suite 900
      Calgary, Alberta T2P 4L4

    Rogers Communications Inc. .......  1,843,809         6.4%
      333 Bloor Street East
      Toronto, Ontaria M4W 1G9

    Dr. Zaki Rakib....................  1,600,000         5.5%
    Shlomo Rakib......................  1,600,000         5.5%
    Michael D'Avella (2) (3)..........  3,057,509        10.6%
    Alek Krstajic (4).................  1,843,809         6.4%
    Christopher J. Schaepe(5).........    121,496       *
    Mark A. Stevens (6)...............     75,741       *
    Lewis Solomon.....................     30,000       *
    Brian Bentley (7).................
    Ray M. Fritz (8)..................    144,829       *
    Dennis Pkcker (9).................   123,118        *
    All executive officers and
      directors as a group
      (9 persons) (10)................  8,485,695        29.2%

    </TABLE>


*  Less than one percent.

(1)     This table is based upon information supplied by officers,
directors and principal stockholders and Schedules 13D and 13G
filed with the Securities and Exchange Commission.  Unless
otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that
all of the stockholders named in the table have sole voting power
and dispositive power with respect to all shares of stock shown as
beneficially owned by them.  Applicable percentages are based on
28,911,824 shares outstanding on March 10, 2000.  In computing the
number of shares indicated as beneficially owned by a person and
the percentage of ownership of that person, shares of Common Stock
subject to options held by that person that are exercisable within
60 days are deemed outstanding.  These shares, however, are not
deemed outstanding for the purpose of computing the percentage of
ownership of any other person.

(2)     Shares beneficially owned includes 36,159 shares issuable pursuant
to a warrant exercisable within 60 days of March 10, 2000.

(3)     Shares beneficially owned includes 3,036,159 shares held by Shaw
Communications Inc.  Mr. D'Avella, a director of the Company, is
the Senior Vice President, Planning for Shaw.  Also includes 20,350
shares issuable upon early exercise of options vesting through
April 2001, of which 8,601 will be fully vested and no longer
subject to repurchase within 60 days of March 10, 2000.  Mr.
D'Avella may be deemed to have voting and investment power over the
shares held by Shaw.  He disclaims beneficial ownership as to all
shares held by Shaw.

(4)     Shares beneficially owned includes 1,843,809 shares held by Rogers
Communications Inc.  Mr. Krstajic, a director of the Company, is
Senior Vice Prsident, Interactive Services, Sales and Product
Development for Rogers Cable Inc. Mr. Krstajic may be deemed to have voting and
investment power over the shares held by Rogers.  He disclaims
beneficial ownership as to all shares held by Rogers.

(5)     Shares beneficially owned includes 112,584 shares held by entities
associated with Weiss, Peck & Greer, LLC., 5,000 of which are
subject to repurchase by the Company within 60 days of March 10,
2000.  Christopher J. Schaepe, a director of the Company, is a
General Partner of WPG Venture Partners III, L.P., the fund
investment advisory member of the entities associated with Weiss,
Peck & Greer.  Mr. Schaepe may be deemed to have voting and
investment power over the shares held by the entities associated
with Weiss, Peck & Greer.  He disclaims beneficial ownership except
to the extent of his pecuniary interest therein.

(6)     5,000 of these shares are subject to repurchase by the Company
within 60 days of March 10, 2000.

(7)     Mr. Bentley is no longer an employee of the Company.

(8)     Shares beneficially owned includes 133,001 shares issuable upon the
early exercise of options, 16,001 of which will be fully vested and no
longer subject to repurchase within 60 days of March 10, 2000.
Also includes 10,833 additional shares of which Mr. Fritz has an
option to acquire.

(9)    Shares beneficially owned includes 15,332 shares subject to
repurchase by the Company within 60 days of March 10, 2000 and
28,001 shares are issuable upon early exercise of options vesting
through May 2001.  Includes 35,033 shares issuable upon the early
exercise of options vesting through May 2003, of which 10,366
shares will be fully vested and no longer subject to repurchase
within 60 days of March 10, 2000.  Also includes 5,417 additional
shares of which Mr. Picker has an option to acquire.

(10)    Shares beneficially owned includes (i) 216,385 shares issuable upon
the early exercise of options vesting through July 2003, 34,958 of
which will be fully vested and no longer subject to repurchase
within 60 days of March 10, 2000, (ii) 25,332 shares subject to
repurchase by the Company within 60 days of March 10, 2000 (iii)
16,250 additional shares of which all directors and officers as a
group have options to acquire within 60 days of March 10, 2000 and
(iv) 36,159 shares issuable pursuant to warrants exercisable within
60 days of March 10, 2000.


ITEM 13. Certain Relationship and Related Transactions

Not Applicable.

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed
on its behalf by the undersigned, thereunto due authorized, in County of
Santa Clara, State of California, on the 28th day of April, 2000.

                                          TERAYON COMMUNICATION SYSTEMS, INC.

                                               /s/ Ray M. Fritz
                                          By___________________________________

                                                    Ray M. Fritz
                                        Chief Financial Officer