Document:

<PAGE>

                                                                     Exhibit 4.4

                         REGISTRATION RIGHTS AGREEMENT
                           Dated as of July 26, 2000

                                 By and Among

                     TERAYON COMMUNICATION SYSTEMS, INC.,

                                  as Issuer,

                                      and

                        DEUTSCHE BANK SECURITIES INC.,

                                      and

                             LEHMAN BROTHERS INC.,

                             as Initial Purchasers

                     5 % Convertible Senior Notes Due 2007
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                      Page
                                                                      ----
<C>  <S>                                                              <C>
1.     Definitions....................................................   1
2.     Shelf Registration.............................................   4
       (a)     Shelf Registration.....................................   4
       (b)     Subsequent Shelf Registrations.........................   4
       (c)     Supplements and Amendments.............................   5
3.     Liquidated Damages.............................................   5
4.     Registration Procedures........................................   7
5.     Registration Expenses..........................................  12
6.     Indemnification................................................  13
7.     Rules 144 and 144A.............................................  16
8.     Underwritten Registrations.....................................  16
9.     Miscellaneous..................................................  16
       (a)     No Inconsistent Agreements.............................  16
       (b)     Adjustments Affecting Registrable Securities...........  17
       (c)     Amendments and Waivers.................................  17
       (d)     Notices................................................  17
       (e)     Successors and Assigns.................................  18
       (f)     Counterparts...........................................  18
       (g)     Headings...............................................  18
       (h)     Governing Law..........................................  18
       (i)     Severability...........................................  18
       (j)     Securities Held by the Company or Its Affiliates.......  18
       (k)     Third Party Beneficiaries..............................  19
       (l)     Entire Agreement.......................................  19
</TABLE>

                                      -i-
<PAGE>

                         REGISTRATION RIGHTS AGREEMENT

          This Registration Rights Agreement (the "Agreement") is dated as of
                                                   ---------
July 26, 2000, by and among TERAYON COMMUNICATION SYSTEMS, INC., a Delaware
corporation (the "Company"), DEUTSCHE BANK SECURITIES INC. and LEHMAN BROTHERS,
                  -------
INC. (individually, an "Initial Purchaser," and together, the "Initial
                        -----------------                      -------
Purchasers").
----------

          This Agreement is entered into in connection with the Purchase
Agreement, dated as of July 20, 2000 (the "Purchase Agreement"), by and among
                                           ------------------
the Company and the Initial Purchasers, which provides for the sale by the
Company to the Initial Purchasers of $500,000,000 aggregate principal amount of
the Company's 5% Convertible Subordinated Notes Due 2007 (the "Firm Notes"),
                                                               ----------
which are convertible into Common Stock of the Company, par value $.001 per
share (the "Underlying Shares"), plus up to an additional $75,000,000 aggregate
            -----------------
principal amount of the same which the Initial Purchasers may subsequently elect
to purchase pursuant to the terms of the Purchase Agreement (the "Additional
                                                                  ----------
Notes" and together with the Firm Notes, the "Convertible Notes"). The Notes
-----                                         -----------------
are being issued pursuant to an indenture dated as of the date hereof (the
"Indenture"), between the Company and State Street Bank and Trust Company of
 ---------
California, N.A., as trustee.

          In order to induce the Initial Purchasers to enter into the Purchase
Agreement, the Company has agreed to provide the registration rights set forth
in this Agreement for the benefit of the Initial Purchasers and any subsequent
holder or holders of the Convertible Notes or Underlying Shares as provided
herein. The execution and delivery of this Agreement is a condition to the
Initial Purchasers' obligation to purchase the Firm Notes under the Purchase
Agreement.

          The parties hereby agree as follows:

1.   Definitions.
     -----------

          As used in this Agreement, the following terms shall have the
following meanings:

          Agreement:  See the first introductory paragraph hereto.
          ---------

          Amount of Registrable Securities: (a) With respect to Convertible
          --------------------------------
Notes constituting Registrable Securities, the aggregate principal amount of all
such Convertible Notes outstanding, (b) with respect to Underlying Shares
constituting Registrable Securities, the aggregate number of such Underlying
Shares outstanding multiplied by the Conversion Price (as defined in the
Indenture relating to the Convertible Notes upon the conversion of which such
Underlying Shares were issued) in effect at the time of computing the Amount of
Registrable Securities or, if no such Convertible Notes are then outstanding,
the last Conversion Price that was in effect under such Indenture when any such
Convertible Notes were last outstanding, and (c) with respect to combinations
thereof, the sum of (a) and (b) for the relevant Registrable Securities.
<PAGE>

          Business Day:  Any day that is not a Saturday, Sunday or a day on
          ------------
which banking institutions in New York are authorized or required by law to be
closed.

          Closing Date:  July 26, 2000.
          ------------

          Company:  See the first introductory paragraph hereto.
          -------

          Convertible Notes:  See the second introductory paragraph hereto.
          -----------------

          Damages Payment Date:  See Section 3(c) hereof.
          --------------------

          Depositary:  The Depository Trust Company until a successor is
          ----------
appointed by the Company.

          Effectiveness Date:  The 180th day after the Closing Date.
          ------------------

          Effectiveness Period:  See Section 2(a) hereof.
          --------------------

          Exchange Act:  The Securities Exchange Act of 1934, as amended, and
          ------------
the rules and regulations of the SEC promulgated thereunder.

          Filing Date:  The 90th day after the Closing Date.
          -----------

          Holder:  Any holder of Registrable Securities.
          ------

          Indemnified Holder:  See Section 6 hereof.
          ------------------

          Indemnified Person:  See Section 6 hereof.
          ------------------

          Indemnifying Person:  See Section 6 hereof.
          -------------------

          Indenture:  See the second introductory paragraph hereto.
          ---------

          Initial Purchasers:  See the first introductory paragraph hereto.
          ------------------

          Initial Shelf Registration:  See Section 2(a) hereof.
          --------------------------

          Inspectors:  See Section 4(n) hereof.
          ----------

          Liquidated Damages:  See Section 3(a) hereof.
          ------------------

          NASD:  See Section 4(q) hereof.
          ----

          Person:  An individual, partnership, corporation, limited liability
          ------
company, unincorporated association, trust or joint venture, or a governmental
agency or political subdivision thereof.

                                      -2-
<PAGE>

          Prospectus:  The prospectus included in any Registration Statement
          ----------
(including, without limitation, any prospectus subject to completion and a
prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.

          Purchase Agreement:  See the second introductory paragraph hereto.
          ------------------

          QIU:  See Section 4(q) hereof.
          ---

          Records:  See Section 4(n) hereof.
          -------

          Registrable Securities:  All Convertible Notes and all Underlying
          ----------------------
Shares upon original issuance thereof and at all times subsequent thereto until
the earliest to occur of (i) a Registration Statement covering such Convertible
Notes and Underlying Shares having been declared effective by the SEC and such
Convertible Notes and Underlying Shares having been disposed of in accordance
with such effective Registration Statement, (ii) such Convertible Notes and
Underlying Shares having been sold in compliance with Rule 144 or could (except
with respect to affiliates of the Company within the meaning of the Securities
Act) be sold in compliance with Rule 144(k), or (iii) such Convertible Notes and
any Underlying Shares ceasing to be outstanding.

          Registration Default:  See Section 3(a) hereof.
          --------------------

          Registration Statement:  Any registration statement of the Company
          ----------------------
filed with the SEC pursuant to the provisions of this Agreement, including the
Prospectus, amendments and supplements to such registration statement, including
post-effective amendments, all exhibits and all material incorporated by
reference or deemed to be incorporated by reference in such registration
statement.

          Rule 144:  Rule 144 promulgated under the Securities Act, as such Rule
          --------
may be amended from time to time, or any similar rule (other than Rule 144A) or
regulation here-after adopted by the SEC providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.

          Rule 144A:  Rule 144A promulgated under the Securities Act, as such
          ---------
Rule may be amended from time to time, or any similar rule (other than Rule 144)
or regulation hereafter adopted by the SEC.

          Rule 415:  Rule 415 promulgated under the Securities Act, as such Rule
          --------
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.

          SEC:  The Securities and Exchange Commission.
          ---

                                      -3-
<PAGE>

          Securities Act:  The Securities Act of 1933, as amended, and the rules
          --------------
and regulations of the SEC promulgated thereunder.

          Shelf Registration:  See Section 2(b) hereof.
          ------------------

          Shelf Registration Statement:  See Section 2(b) hereof.
          ----------------------------

          Subsequent Shelf Registration:  See Section 2(b) hereof.
          -----------------------------

          TIA:  The Trust Indenture Act of 1939, as amended, and the rules and
          ---
regulations of the SEC promulgated thereunder.

          Trustee:  The Trustee under the Indenture.
          -------

          Underlying Shares:  See the second introductory paragraph hereto.
          -----------------

          Underwritten registration or underwritten offering:  A registration in
          --------------------------------------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.

2.   Shelf Registration.
     ------------------

          (a)  Shelf Registration.  The Company shall use all reasonable efforts
               ------------------
to file with the SEC a Registration Statement for an offering to be made on a
continuous basis pursuant to Rule 415 covering all of the Registrable Securities
(the "Initial Shelf Registration") on or prior to the Filing Date. The Initial
      --------------------------
Shelf Registration shall be on Form S-3 or another appropriate form permitting
registration of such Registrable Securities for resale by Holders in the manner
or manners designated by them (including, without limitation, one or more
underwritten offerings). The Company shall not permit any securities other than
the Registrable Securities to be included in the Initial Shelf Registration or
any Subsequent Shelf Registration (as defined below).

          The Company shall use all reasonable efforts to cause the Initial
Shelf Registration to be declared effective under the Securities Act on or prior
to the Effectiveness Date and to keep such Initial Shelf Registration
continuously effective under the Securities Act until the date that is two years
from the Closing Date (as it may be shortened pursuant to clause (i) or clause
(ii) immediately following, the "Effectiveness Period"), or such shorter period
                                 --------------------
ending when (i) all the shares of Registrable Securities covered by the Initial
Shelf Registration have been sold in the manner set forth and as contemplated in
the Initial Shelf Registration, (ii) the date on which all the Registrable
Securities (x) held by Persons who are not affiliates of the Company may be
resold pursuant to Rule 144(k) under the Securities Act or (y) cease to be
outstanding, or (iii) a Subsequent Shelf Registration covering all of the
Registrable Securities has been declared effective under the Securities Act.

          (b)  Subsequent Shelf Registrations.  If the Initial Shelf
               ------------------------------
Registration or any Subsequent Shelf Registration ceases to be effective for any
reason at any time during the Effectiveness Period (other than because of the
sale of all of the securities registered thereunder), the

                                      -4-
<PAGE>

Company shall use all reasonable efforts to obtain the prompt withdrawal of any
order suspending the effectiveness thereof, and in any event shall within 45
days of such cessation of effectiveness amend the Initial Shelf Registration in
a manner to obtain the withdrawal of the order suspending the effectiveness
thereof, or file an additional "shelf" Registration Statement pursuant to Rule
415 covering all of the Registrable Securities (a "Subsequent Shelf
                                                   ----------------
Registration"). If a Subsequent Shelf Registration is filed, the Company shall
-------------
use all reasonable efforts to cause the Subsequent Shelf Registration to be
declared effective under the Securities Act as soon as practicable after such
filing and to keep such Registration Statement continuously effective for a
period equal to the number of days in the Effectiveness Period less the
aggregate number of days during which the Initial Shelf Registration or any
Subsequent Shelf Registration was previously continuously effective. As used
herein the term "Shelf Registration" means the Initial Shelf Registration and
                 ------------------
any Subsequent Shelf Registration and the term "Shelf Registration Statement"
                                                ----------------------------
means any Registration Statement filed in connection with a Shelf Registration.

          (c)  Supplements and Amendments.  The Company shall promptly
               --------------------------
supplement and amend the Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if reasonably
requested by the Holders of the majority in Amount of Registrable Securities
covered by such Registration Statement or by any underwriter of such Registrable
Securities.

3.   Liquidated Damages.
     ------------------

          (a)  The Company and the Initial Purchasers agree that the Holders of
Registrable Securities will suffer damages if the Company fails to fulfill its
obligations under Section 2 hereof and that it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, the Company
agrees to pay liquidated damages on the Registrable Securities ("Liquidated
                                                                 ----------
Damages") under the circumstances and to the extent set forth below (each of
-------
which shall be given independent effect; each a "Registration Default"):
                                                 --------------------

          (i)  if the Initial Shelf Registration is not filed on or prior to the
     Filing Date, then commencing on the day after the Filing Date, Liquidated
     Damages shall accrue on the Registrable Securities at a rate of 0.50% per
     annum on the Amount of Registrable Securities for the first 90 days
     immediately following the Filing Date, such Liquidated Damages increasing
     by an additional 0.50% per annum at the beginning of each subsequent 90-day
     period;

          (ii) if the Company fails to use all reasonable efforts and the
     Initial Shelf Registration is not declared effective by the SEC on or prior
     to the Effectiveness Date, then commencing one day after the Effectiveness
     Date, Liquidated Damages shall accrue on the Registrable Securities at a
     rate of 0.50% per annum on the Amount of Registrable Securities for the
     first 90 days immediately following the day after such Effectiveness Date,
     such Liquidated Damages increasing by an additional 0.50% per annum at the
     beginning of each subsequent 90-day period; and

                                      -5-
<PAGE>

          (iii)   if a Shelf Registration has been declared effective and such
     Shelf Registration ceases to be effective at any time during the
     Effectiveness Period (other than as permitted under Section 3(b)), then
     Liquidated Damages shall accrue on the Registrable Securities at a rate of
     0.50% per annum on the Amount of Registrable Securities for the first 90
     days commencing on the day such Shelf Registration ceases to be effective,
     such Liquidated Damages increasing by an additional 0.50% per annum at the
     beginning of each such subsequent 90-day period;

provided, however, that Liquidated Damages on the Registrable Securities may not
--------  -------
accrue under more than one of the foregoing clauses (i), (ii) or (iii) at any
one time and at no time shall the aggregate amount of Liquidated Damages
accruing exceed in the aggregate 1.0% per annum of the Amount of Registrable
Securities; provided, further, however, that (1) upon the filing of the Shelf
            --------  -------  -------
Registration as required hereunder (in the case of clause (a)(i) of this Section
3), (2) upon the effectiveness of the Shelf Registration as required hereunder
(in the case of clause (a)(ii) of this Section 3), or (3) upon the effectiveness
of a Shelf Registration which had ceased to remain effective (in the case of
(a)(iii) of this Section 3), Liquidated Damages on the Registrable Securities as
a result of such clause (or the relevant subclause thereof), as the case may be,
shall cease to accrue. It is understood and agreed that, notwithstanding any
provision to the contrary, so long as any Registrable Security is then covered
by an effective Shelf Registration Statement, no Liquidated Damages shall accrue
on such Registrable Security.

          (b)  Notwithstanding paragraph (a) of this Section 3, the Company
shall be permitted to suspend the effectiveness of a Shelf Registration for any
reason whatsoever for up to 45 consecutive days in any 120 day period, for a
total of not more than 90 days in any calendar year, without paying Liquidated
Damages.

          (c)  So long as Convertible Notes remain outstanding, the Company
shall notify the Trustee within two Business Days after each and every date on
which an event occurs in respect of which Liquidated Damages is required to be
paid . Any amounts of Liquidated Damages due pursuant to (a)(i), (a)(ii) or
(a)(iii) of this Section 3 will be payable in cash semi-annually on each
February 1 and August 1 (each a "Damages Payment Date"), commencing with the
                                 --------------------
first such date occurring after any such Liquidated Damages commences to accrue,
to Holders to whom regular interest is payable on such Damages Payment Date with
respect to Convertible Notes that are Registrable Securities and to Persons that
are registered Holders on the January 15 or July 15 immediately preceding such
Damages Payment Date with respect to Underlying Shares that are Registrable
Securities. The amount of Liquidated Damages for Registrable Securities will be
determined by multiplying the applicable rate of Liquidated Damages by the
Amount of Registrable Securities outstanding on the Damages Payment Date
following such Registration Default in the case of the first such payment of
Liquidated Damages with respect to a Registration Default (and thereafter at the
next succeeding Damages Payment Date until the cure of such Registration
Default), multiplied by a fraction, the numerator of which is the number of days
such Liquidated Damages rate was applicable during such period (determined on
the basis of a 360-day year comprised of twelve 30-day months and, in the case
of a partial month, the actual number of days elapsed), and the denominator of
which is 360.

                                      -6-
<PAGE>

4.   Registration Procedures.
     -----------------------

          In connection with the filing of any Registration Statement pursuant
to Section 2 hereof, the Company shall effect such registrations to permit the
sale of the securities covered thereby in accordance with the intended method or
methods of disposition thereof, and pursuant thereto and in connection with any
Registration Statement filed by the Company hereunder the Company shall:

          (a)  Prepare and file with the SEC on or prior to the Filing Date, a
Registration Statement or Registration Statements as prescribed by Section 2
hereof, and use all reasonable efforts to cause each such Registration Statement
to become effective and remain effective as provided herein; provided, however,
                                                             --------  -------
that before filing any Registration Statement or Prospectus or any amendments or
supplements thereto, the Company shall furnish to and afford the Holders of the
Registrable Securities covered by such Registration Statement and the managing
underwriters, if any, a reasonable opportunity to review copies of all such
documents proposed to be filed (in each case, where possible, at least five
Business Days prior to such filing, or such later date as is reasonable under
the circumstances). The Company shall not file any Registration Statement or
Prospectus or any amendments or supplements thereto if the Holders of a majority
in Amount of Registrable Securities covered by such Registration Statement or
the managing underwriters, if any, shall reasonably object.

          (b)  Prepare and file with the SEC such amendments and post-effective
amendments to each Shelf Registration, as may be necessary to keep such
Registration Statement continuously effective for the Effectiveness Period;
cause the related Prospectus to be supplemented by any Prospectus supplement
required by applicable law, and as so supplemented to be filed pursuant to Rule
424 (or any similar provisions then in force) promulgated under the Securities
Act; and comply with the provisions of the Securities Act and the Exchange Act
applicable to it with respect to the disposition of all securities covered by
such Registration Statement as so amended or in such Prospectus as so
supplemented. The Company shall be deemed not to have used all reasonable
efforts to keep a Registration Statement effective during the Effectiveness
Period if it voluntarily takes any action that would result in selling Holders
of the Registrable Securities covered thereby not being able to sell such
Registrable Securities during that period unless such action is required by
applicable law or unless the Company complies with this Agreement, including
without limitation the provisions of Section 4(k) hereof.

          (c)  Notify the selling Holders of Registrable Securities and the
managing underwriters, if any, promptly (but in any event within two Business
Days), (i) when a Prospectus or any prospectus supplement or post-effective
amendment has been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective under the
Securities Act (including in such notice a written statement that any Holder
may, upon request, obtain, at the sole expense of the Company, one conformed
copy of such Registration Statement or post-effective amendment including
financial statements and schedules, documents incorporated or deemed to be
incorporated by reference and exhibits), (ii) of the issuance by the SEC of any
stop order suspending the effectiveness of a Registration Statement or of any
order preventing or

                                      -7-
<PAGE>

suspending the use of any preliminary prospectus or the initiation of any
proceedings for that purpose, (iii) of the happening of any event, the existence
of any condition or any information becoming known that makes any statement made
in such Registration Statement or related Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires the making of any changes in or amendments or
supplements to such Registration Statement, Prospectus or documents so that, in
the case of the Registration Statement, it will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and that in
the case of the Prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading and (iv) of the Company's
determination that a post-effective amendment to a Registration Statement would
be appropriate.

          (d)  Use all reasonable efforts to prevent the issuance of any order
suspending the effectiveness of a Registration Statement or of any order
preventing or suspending the use of a Prospectus and, if any such order is
issued, to use its reasonable best efforts to obtain the withdrawal of any such
order at the earliest possible moment.

          (e)  If requested by the managing underwriter or underwriters (if any)
or the Holders of the majority in Amount of Registrable Securities being sold in
connection with an underwritten offering (i) promptly incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriter or underwriters (if any), or such Holders reasonably
determine is necessary to be included therein, (ii) make all required filings of
such prospectus supplement or such post-effective amendment as soon as
reasonably practicable after the Company has received notification of the
matters to be incorporated in such prospectus supplement or post-effective
amendment and (iii) supplement or make amendments to such Registration
Statement.

          (f)  Deliver to each selling Holder of Registrable Securities, a
single counsel to such Holders (chosen in accordance with Section 5(b)) and the
underwriters, if any, at the sole expense of the Company, as many copies of the
Prospectus (including each form of preliminary prospectus) and each amendment or
supplement thereto and any documents incorporated by reference therein as such
Persons may reasonably request; and, subject to the second paragraph of Section
4(s) hereof, the Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the selling Holders of Registrable
Securities and the underwriters or agents, if any, and dealers (if any), in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto.

          (g)  Prior to any public offering of Registrable Securities, to use
all reasonable efforts to register or qualify, to the extent required by
applicable law, and to cooperate with the selling Holders of Registrable
Securities and the managing underwriter or underwriters, if any, in connection
with the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities or offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder, or the managing underwriter or

                                      -8-
<PAGE>

underwriters, if any, reasonably request; provided, however, that where
                                          --------  -------
Registrable Securities are offered other than through an underwritten offering,
the Company agrees to cause the Company's counsel to perform Blue Sky
investigations and file registrations and qualifications required to be filed
pursuant to this Section 4(g); keep each such registration or qualification (or
exemption therefrom) effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or things reasonably
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the applicable Registration Statement;
provided, however, that the Company shall not be required to (A) qualify
--------  -------
generally to do business in any jurisdiction where it is not then so qualified,
(B) take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or (C) subject itself to
taxation in excess of a nominal dollar amount in any such jurisdiction where it
is not then so subject.

          (h)  Cooperate with the selling Holders of Registrable Securities and
the managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing shares of Registrable
Securities to be sold, which certificates shall not bear any restrictive legends
and shall be in a form eligible for deposit with The Depository Trust Company;
and enable such shares of Registrable Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if any, or
Holders may reasonably request.

          (i)  Use all reasonable efforts to cause the Registrable Securities
covered by any Shelf Registration Statement to be registered with or approved by
such other governmental agencies or authorities as may be reasonably necessary
to enable the seller or sellers thereof or the underwriter or underwriters, if
any, to consummate the disposition of such Registrable Securities, except as may
be required solely as a consequence of the nature of such selling Holder's
business, in which case the Company will cooperate in all reasonable respects
with the filing of such Registration Statement and the granting of such
approvals.

          (j)  Upon the occurrence of any event contemplated by paragraph
4(c)(ii), 4(c)(iii) or 4(c)(iv) hereof, as promptly as practicable prepare and
(subject to Section 4(a) hereof) file with the SEC, at the sole expense of the
Company, a supplement or post-effective amendment to the Registration Statement
or a supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable Securities
being sold thereunder, any such Prospectus will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

          (k)  Prior to the effective date of the first Registration Statement
relating to the Registrable Securities, (i) provide the Trustee with
certificates for the Registrable Securities in a form eligible for deposit with
The Depository Trust Company and (ii) provide a CUSIP number for the Registrable
Securities.

          (l)  In connection with any underwritten offering of Registrable
Securities pursuant to a Shelf Registration, enter into an underwriting
agreement as is customary in underwritten offerings of securities similar to the
Registrable Securities and take all such other

                                      -9-
<PAGE>

actions as are reasonably requested by the managing underwriter or underwriters
in order to expedite or facilitate the registration or the disposition of such
Registrable Securities and, in such connection, (i) make such representations
and warranties to, and covenants with, the underwriters with respect to the
business of the Company and its subsidiaries (including any acquired business,
properties or entity, if applicable) and the Registration Statement, Prospectus
and documents, if any, incorporated or deemed to be incorporated by reference
therein, in each case, as are customarily made by issuers to underwriters in
underwritten offerings of securities similar to the Registrable Securities and
confirm the same in writing if and when requested; (ii) obtain the written
opinion of counsel to the Company and written updates thereof in form, scope and
substance reasonably satisfactory to the managing underwriter or underwriters,
addressed to the underwriters covering the matters customarily covered in
opinions requested in underwritten offerings of securities similar to the
Registrable Securities and such other matters as may be reasonably requested by
the managing underwriter or underwriters; and (iii) obtain "cold comfort"
letters and updates thereof in form, scope and substance reasonably satisfactory
to the managing underwriter or underwriters from the independent certified
public accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any business
acquired by the Company for which financial statements and financial data are,
or are required to be, included or incorporated by reference in the Registration
Statement), addressed to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
com-fort" letters in connection with underwritten offerings of securities
similar to the Registrable Securities and such other matters as reasonably
requested by the managing underwriter or underwriters as permitted by the
Statement on Auditing Standards No. 72. The above shall be done as and to the
extent required by such underwriting agreement.

          (m)  Make available for inspection by any selling Holder of such
Registrable Securities being sold, any underwriter participating in any such
disposition of Registrable Securities, if any, and any attorney, accountant or
other agent retained by any such selling Holder, or underwriter (collectively,
the "Inspectors"), at the offices where normally kept, during reasonable
     ----------
business hours at such time or times as shall be mutually convenient for the
Company and the Inspectors as a group, all financial and other records,
pertinent corporate documents and instruments of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably necessary to
                                 -------
enable them to exercise any applicable due diligence responsibilities, and cause
the officers, directors and employees of the Company and its subsidiaries to
supply all information reasonably requested by any such Inspector in connection
with such Registration Statement. Records that the Company determines, in good
faith, to be confidential and any Records that it notifies the Inspectors are
confidential shall not be disclosed by any Inspector unless (i) the disclosure
of such Records is necessary to avoid or correct a material misstatement or
material omission in such Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, (iii) disclosure of such information is, in the opinion
of counsel for any Inspector, necessary or advisable in connection with any
action, claim, suit or proceeding, directly involving or potentially involving
such Inspector and arising out of, based upon, relating to, or involving this
Agreement or any transactions contemplated hereby or arising hereunder or (iv)
the information in such Records has been made generally available to the public
other than through the acts of such Inspector; provided, however, that prior
                                               --------  -------
notice shall be provided as soon as practicable

                                     -10-
<PAGE>

to the Company of the potential disclosure of any information by such Inspector
pursuant to clauses (ii) or (iii) of this sentence to permit the Company to
obtain a protective order (or waive the provisions of this paragraph (n)). Each
Inspector shall take such actions as are reasonably necessary to protect the
confidentiality of such information (if practicable) to the extent such actions
are otherwise not inconsistent with, an impairment of or in derogation of the
rights and interests of the Holder or any Inspector, unless and until such
information in such Records has been made generally available to the public
other than as a result of a breach of this Agreement.

          (n)  Provide (i) the Holders of the Registrable Securities to be
included in such Registration Statement and not more than one counsel for all
the Holders of such Registrable Securities chosen in accordance with Section
5(b), (ii) the underwriters (which term, for purposes of this Registration
Rights Agreement, shall include a Person deemed to be an underwriter within the
meaning of Section 2(11) of the Securities Act), if any, thereof, (iii) the
sales or placement agent, if any, thereof, and (D) one counsel for such
underwriters or agents, reasonable opportunity to participate in the preparation
of such Registration Statement, each prospectus included therein or filed with
the SEC, and each amendment or supplement thereto.

          (o)  Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earning statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act) no later than 45 days
after the end of any 12-month period (or 90 days after the end of any 12-month
period if such period is a fiscal year) (i) commencing at the end of any fiscal
quarter in which Registrable Securities are sold to underwriters in a firm
commitment or best efforts underwritten offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of a Registration
Statement, which statements shall cover said 12-month periods.

          (p)  Cooperate with each seller of Registrable Securities covered by
any Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.  (the "NASD"), including, if the Conduct Rules of the
                                ----
NASD or any successor thereto as amended from time to time so require, engaging
a "qualified independent underwriter" ("QIU") as contemplated therein and making
                                        ---
Records available to such QIU as though it were a participating underwriter for
the purposes of Section 4(n) and otherwise applying the provisions of this
Agreement to such QIU (including indemnification) as though it were a
participating underwriter.

          (q)  Cause the Indenture to be qualified under the TIA not later than
the effective date of the first Registration Statement relating to the
Registrable Securities; and in connection therewith, cooperate with the Trustee
and the Holders of the Registrable Securities to effect such changes to the
Indenture as may be required for the Indenture to be so qualified in accordance
with the terms of the TIA; and execute, and use all reasonable efforts to cause
the Trustee to execute, all documents as may be required to effect such changes
and all other forms and documents required to be filed with the SEC to enable
the Indenture to be so qualified in a timely manner.

                                     -11-
<PAGE>

          (r)  Use all reasonable efforts to take all other steps necessary or
advisable to effect the registration of the Registrable Securities covered by a
Registration Statement contemplated hereby.

          The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding such seller and the distribution of such Registrable
Securities as the Company may, from time to time, reasonably request to the
extent necessary or advisable to comply with the Securities Act. The Company may
exclude from such registration the Registrable Securities of any seller if such
seller fails to furnish such information within 20 Business Days after receiving
such request. Each seller as to which any Shelf Registration is being effected
agrees to furnish promptly to the Company all information required to be
disclosed so that the information previously furnished to the Company by such
seller is not materially misleading and does not omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made.

          Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon actual receipt of any notice from the Company
of the happening of any event of the kind described in Section 4(c)(ii),
4(c)(iii) or 4(c)(iv) hereof, such Holder will forthwith discontinue disposition
of such Registrable Securities covered by such Registration Statement or
Prospectus until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 4(j) hereof, or until it is advised
in writing by the Company that the use of the applicable Prospectus may be
resumed, and has received copies of any amendments or supplements thereto.

5.   Registration Expenses.
     ---------------------

          (a)  All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company,
including, without limitation, (i) all registration and filing fees (including,
without limitation, (A) fees with respect to filings required to be made with
the NASD in connection with an underwritten offering and (B) fees and expenses
of compliance with state securities or Blue Sky laws (including, without
limitation, reasonable fees and disbursements of counsel in connection with Blue
Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as provided in Section 4(h) hereof), (ii) printing expenses,
including, without limitation, expenses of printing certificates for Registrable
Securities in a form eligible for deposit with The Depository Trust Company and
of printing prospectuses if the printing of prospectuses is requested by the
managing underwriter or underwriters, if any, or by the Holders of the majority
in Amount of Registrable Securities included in any Registration Statement,
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company and reasonable fees and disbursements of one special
counsel for the sellers of Registrable Securities (subject to the pro-visions of
Section 5(b) hereof), (v) fees and disbursements of all independent certified
public accountants referred to in Section 4(m)(iii) hereof (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) Securities

                                     -12-
<PAGE>

Act liability insurance, if the Company desires such insurance, (vii) fees and
expenses of all other Persons retained by the Company, (viii) internal expenses
of the Company (including, without limitation, all salaries and expenses of
officers and employees of the Company performing legal or accounting duties),
(ix) the expense of any annual audit, (x) the fees and expenses incurred in
connection with the listing of the securities to be registered on any securities
exchange, if applicable, and (xi) the expenses relating to printing, word
processing and distributing all Registration Statements, underwriting
agreements, securities sales agreements and any other documents necessary in
order to comply with this Agreement. Notwithstanding anything in this Agreement
to the contrary, each Holder shall pay all underwriting discounts and brokerage
commissions with respect to any Registrable Securities sold by it.

          (b)  The Company shall reimburse the Holders of the Registrable
Securities being registered in a Shelf Registration for the reasonable fees and
disbursements of not more than one counsel chosen by the Holders of a majority
in Amount of Registrable Securities to be included in such Registration
Statement.

6.   Indemnification.
     ---------------

          The Company agrees to indemnify and hold harmless (i) each Initial
Purchaser, (ii) each Holder, (iii) each Person, if any, who controls (within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act) any of the foregoing (any of the Persons referred to in this clause (iii)
being hereinafter referred to as a "controlling person"), (iv) the respective
officers, directors, partners, employees, representatives and agents of the
Initial Purchasers, the Holders (including predecessor Holders) or any
controlling person (any person referred to in clause (i), (ii), (iii) or (iv)
may hereinafter be referred to as an "Indemnified Holder"), from and against any
                                      ------------------
and all losses, claims, damages, liabilities and judgments (including, without
limitation, reasonable legal fees and other expenses incurred in connection with
any suit, action or proceeding or any claim asserted) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus, or any amendment or supplement thereto or
any related preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Holder furnished to the Company in
writing by such Holder expressly for use in therein; provided, however, that the
                                                     --------  -------
Company shall not be liable to any Indemnified Holder under the indemnity
agreement of this paragraph with respect to any preliminary prospectus to the
extent that any such loss, claim, damage, liability, judgment or expense of such
Indemnified Holder results from the fact that such Indemnified Holder sold
Registrable Securities under a Registration Statement to a Person as to whom it
shall be established that there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the Prospectus (or of the
preliminary prospectus as then amended or supplemented if the Company shall have
furnished such Indemnified Holder with such amendment or supplement thereto on a
timely basis), in any case where such delivery is required by applicable law and
the loss, claim, damage, liability or expense of such Indemnified Holder results
from an untrue statement or omission of a material

                                     -13-
<PAGE>

fact contained in the preliminary prospectus which was corrected in the
Prospectus (or in the preliminary prospectus as then amended or supplemented if
the Company shall have furnished such Indemnified Holder with such amendment or
supplement thereto, as the case may be, on a timely basis). The Company shall
notify Indemnified Holder promptly of the institution, threat or assertion of
any claim, proceeding (including any governmental investigation) or litigation
in connection with the matters addressed by this Agreement which involves the
Company or such Indemnified Holder.

          Each Holder agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, officers and each Person who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act to the same extent as the foregoing indemnity from the
Company to each Holder, but only with reference to such losses, claims, damages
or liabilities which are caused by any untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information relating to a Holder furnished to the Company in writing by such
Holder expressly for use in any Registration Statement or Prospectus, or any
amendment or supplement thereto or any related preliminary prospectus.

          If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any Person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs, such Per-son (the "Indemnified Person") shall promptly
                                             ------------------
notify the Person or Persons against whom such indemnity may be sought (each an
"Indemnifying Person") in writing, and such Indemnifying Person, upon request of
 -------------------
the Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others entitled
to indemnification pursuant to this Section 6 that the Indemnifying Person may
designate in such proceeding and shall pay the fees and expenses of such counsel
related to such proceeding. In any such proceeding, any Indemnified Person shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Person unless (i) such
Indemnifying Person and the Indemnified Person shall have mutually agreed to the
contrary, (ii) such Indemnifying Person has failed within a reasonable time to
retain counsel reasonably satisfactory to such Indemnified Person or (iii) the
named parties in any such proceeding (including any impleaded parties) include
an Indemnifying Person and an Indemnified Person and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that an Indemnifying Person
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Indemnified Persons, and that all
such fees and expenses shall be reimbursed as they are incurred. Any such
separate firm for the Indemnified Holders shall be designated in writing by the
Holders of the majority in Amount of Registrable Securities, and any such
separate firm for the Company, its directors, respective officers and such
control Persons of the Company shall be designated in writing by the Company.
The Indemnifying Person shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, such Indemnifying Person agrees to
indemnify any Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. No Indemnifying Person shall, without the
prior written consent of

                                     -14-
<PAGE>

the Indemnified Person, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Person is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Person,
unless such settlement includes an unconditional release of such Indemnified
Person from all liability on claims that are the subject matter of such
proceeding.

          If the indemnification provided for in the first and second paragraphs
of this Section 6 is unavailable to an Indemnified Person or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each Indemnifying Person under such paragraph, in lieu of indemnifying such
Indemnified Person thereunder, shall contribute to the amount paid or payable by
such Indemnified Person as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Indemnifying Person on the one hand and the Indemnified
Person on the other hand pursuant to the Purchase Agreement or from the offering
of the Registrable Securities pursuant to any Shelf Registration or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Indemnifying
Per-son on the one hand and the Indemnified Person on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and any Indemnified
Holder on the other shall be deemed to be in the same proportion as the total
net proceeds from the initial offering and sale of Convertible Notes (before
deducting expenses) received by the Company bear to the total net proceeds
received by such Indemnified Holder from sales of Registrable Securities giving
rise to such obligations. The relative fault of the parties shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or such Indemnified
Holder and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.

          Each of the Company and the Initial Purchasers agrees that it would
not be just and equitable if contribution pursuant to this Section 6 were
determined by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an Indemnified Person as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 6, in no event shall
any Holder be required to contribute any amount in excess of the amount by which
the net proceeds received by such Holder from the sale of the Registrable
Securities pursuant to a Shelf Registration Statement exceeds the amount of
damages which such Holder would have otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(F) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.

                                     -15-
<PAGE>

          The remedies provided for in this Section 6 are not exclusive and
shall not limit any rights or remedies that may otherwise be available to any
indemnified party at law or in equity.

          The indemnity and contribution agreements contained in this Section 6
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Holder or any Person controlling any Holder or by or on behalf of the
Company, its officers or directors or any other Person con-trolling any of the
Company and (iii) acceptance of and payment for any of the Registrable
Securities.

7.   Rules 144 and 144A.
     ------------------

          The Company covenants that it will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder in a timely manner in accordance with
the requirements of the Securities Act and the Exchange Act and, for so long as
any Registrable Securities remain outstanding, if at any time the Company is not
required to file such reports, it will, upon the request of any Holder or
beneficial owner of Registrable Securities, make available such information
necessary to permit sales pursuant to Rule 144A under the Securities Act. The
Company further covenants that, for so long as any Registrable Securities remain
outstanding, it will use all reasonable efforts to take such further action as
any Holder of Registrable Securities may reasonably request, all to the extent
required from time to time to enable such holder to sell Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act,
as such rules may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC. Notwithstanding the foregoing, nothing
in this Section 7 shall be deemed to require the Company to register any of its
securities pursuant to the Exchange Act.

8.   Underwritten Registrations.
     --------------------------

          If any of the Registrable Securities covered by any Shelf Registration
are to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Holders of the majority in Amount of Registrable Securities to be
included in such offering and be reasonably acceptable to the Company.

          No Holder of Registrable Securities may participate in any
underwritten registration hereunder unless such Holder (a) agrees to sell such
Holder's Registrable Securities on the basis provided in any underwriting
arrangements approved by the Persons entitled hereunder to approve such
arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.

9.   Miscellaneous.
     -------------

          (a)  No Inconsistent Agreements.  The Company has not, as of the
               --------------------------
date hereof, and the Company shall not, after the date of this Agreement, enter
into any agreement with respect to any of its securities that is inconsistent
with the rights granted to the Holders of Registrable Securities in
                                     -16-
<PAGE>

this Agreement or otherwise conflicts with the provisions hereof. The Company
has not entered and will not enter into any agreement with respect to any of its
securities that will grant to any Person piggyback registration rights with
respect to a Registration Statement, except to the extent any existing right has
heretofore been waived.

          (b)  Adjustments Affecting Registrable Securities.  The Company shall
               --------------------------------------------
not, directly or indirectly, take any action withrespect to the Registrable
Securities as a class that would adversely affect the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.

          (c)  Amendments and Waivers.  The provisions of this Agreement may
               ----------------------
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, otherwise than with the prior
written consent of the Company and the Holders of not less than the majority in
Amount of Registrable Securities; provided, however, that Section 6 and this
                                  --------  -------
Section 9(c) may not be amended, modified or supplemented without the prior
written consent of the Company and each Holder (including, in the case of an
amendment, modification or supplement of Section 6, any Person who was a Holder
of Registrable Securities disposed of pursuant to any Registration Statement).
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders of Registrable Securities whose securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect, impair,
limit or compromise the rights of other Holders of Registrable Securities may be
given by Holders of at least a majority in Amount of the Registrable Securities
being sold by such Holders pursuant to such Registration Statement.

          (d)  Notices.  All notices and other communications (including
               -------
without limitation any notices or other communications to the Trustee) provided
for or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next-day air courier or facsimile:

          (1)  if to a Holder of the Registrable Securities, at the most current
     address of such Holder set forth on the records of the registrar under the
     Indenture, in the case of Holders of Convertible Notes, and the stock
     ledger of the Company, in the case of Holders of common stock of the
     Company.

          (2)  if to the Initial Purchasers:
               DEUTSCHE BANK SECURITIES INC.
               LEHMAN BROTHERS, INC.
               c/o Deutsche Bank Securities Inc.
               1 South Street
               Baltimore, Maryland  21202
               Attention: Equity Syndicate

          (3)  if to the Company, at the addresses as follows:

               Terayon Communication Systems, Inc.
               2952 Bunker Hill Lane

                                     -17-
<PAGE>

               Santa Clara, California 95054
               Facsimile No.: (408) 727-6205
               Attention: Chief Financial Officer

          All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, postage prepaid, if mailed; one Business Day after
being timely delivered to a next-day air courier; and when the addressor
receives facsimile confirmation, if sent by facsimile.

          (e)  Successors and Assigns.  This Agreement shall inure to the
               ----------------------
benefit of and be binding upon the successors and assigns of each of the parties
hereto, including the Holders; provided, however, that this Agreement shall not
                               --------  -------
inure to the benefit of or be binding upon a successor or assign of a Holder
unless and except to the extent such successor or assign holds Registrable
Securities.

          (f)  Counterparts.  This Agreement may be executed in any number of
               ------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.

          (g)  Headings.  The headings in this Agreement are for convenience of
               --------
reference only and shall not limit or otherwise affect the meaning hereof.

          (h)  Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
               -------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.

          (i)  Severability.  If any term, provision, covenant or restriction of
               ------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

          (j)  Securities Held by the Company or Its Affiliates.  Whenever the
               ------------------------------------------------
consent or approval of Holders of a specified percentage in Amount of
Registrable Securities is required hereunder, Registrable Securities held by the
Company or its affiliates (as such term is defined in Rule 405 under the
Securities Act) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.

                                     -18-
<PAGE>

          (k)  Third Party Beneficiaries.  Holders of Registrable Securities are
               -------------------------
intended third party beneficiaries of this Agreement and this Agreement may be
enforced by such Persons.

          (l)  Entire Agreement.  This Agreement, together with the Purchase
               ----------------
Agreement and the Indenture, is intended by the parties as a final and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein and any and all prior oral or
written agreements, representations, or warranties, contracts, understandings,
correspondence, conversations and memoranda between the Initial Purchasers on
the one hand and the Company on the other, or between or among any agents,
representatives, parents, subsidiaries, affiliates, predecessors in interest or
successors in interest with respect to the subject matter hereof and thereof are
merged herein and replaced hereby.

                                     -19-
<PAGE>

          IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                   TERAYON COMMUNICATION SYSTEMS, INC.

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

                                   DEUTSCHE BANK SECURITIES INC.
                                   LEHMAN BROTHERS, INC.

                                   By: DEUTSCHE BANK SECURITIES INC.

                                   By: /s/ Tony Meneghetti
                                       _______________________________________
                                       Name: Tony Meneghetti
                                       Title: Acting Director<PAGE>

                                                                     EXHIBIT 4.1

                            FOUNDRY NETWORKS, INC.

                     2000 NON-EXECUTIVE STOCK OPTION PLAN

     1.   Purposes of the Plan.  The purposes of this 2000 Non-Executive Stock
          --------------------
Option Plan are to attract and retain the best available personnel for positions
of substantial responsibility, to provide additional incentive to the Employees
and Consultants of the Company and to promote the success of the Company's
business. Options granted hereunder shall be Nonstatutory Stock Options.

     2.   Definitions.  As used herein, the following definitions shall apply:
          -----------

          (a) "Administrator" shall mean the Board or any of its Committees
               -------------
appointed pursuant to Section 4 of the Plan.

          (b) "Affiliate" means an entity which, together with the Company, is
               ---------
under common control of a third person or entity.

          (c) "Applicable Laws" means the legal requirements relating to the
               ---------------
administration of stock option plans under applicable U.S. state corporate laws,
U.S. federal and applicable state securities laws, the Code, any Stock Exchange
rules and regulations and the applicable laws of any other country or
jurisdiction where Options are granted under the Plan, as such laws, rules,
regulations and requirements shall be in place from time to time.

          (d) "Board" shall mean the Board of Directors of the Company.
               -----

          (e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
               ----

          (f) "Committee" shall mean the Committee appointed by the Board of
               ---------
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.

          (g) "Common Stock" shall mean the Common Stock of the Company.
               ------------

          (h) "Company" shall mean Foundry Networks, Inc., a Delaware
               -------
corporation.

          (i) "Consultant" shall mean any person who is engaged by the Company
               ----------
or any Parent, Subsidiary or Affiliate to render consulting services and is
compensated for such consulting services, excluding any Officers, Named
Executives and Directors.

          (j) "Continuous Service Status" means the absence of any interruption
               -------------------------
or termination of service as an Employee or Consultant to the Company or a
Parent, Subsidiary or Affiliate.  Continuous Service Status shall not be
considered interrupted in the case of:  (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Parents, Subsidiaries or Affiliates or their respective successors.
A change in status from an Employee to a Consultant or from a Consultant to an
Employee will not constitute an interruption of Continuous Service Status.
<PAGE>

          (k) "Director" shall mean a member of the Board.
               --------

          (l) "Employee" shall mean any person who is employed by the Company or
               --------
any Parent, Subsidiary or Affiliate of the Company, excluding any Officer, Named
Executive and Director.

          (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
               ------------
amended.

          (n) "Fair Market Value" shall mean, as of any date, the value of
               -----------------
Common Stock determined as follows:

              (i)    If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other source
                                    -----------------------
as the Administrator deems reliable;

              (ii)   If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock or;

              (iii)  In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.

          (o) "Named Executive" shall mean any individual who, on the last day
               ---------------
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer).  Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.

          (p) "Nonstatutory Stock Option" shall mean an Option not intended to
               -------------------------
qualify as an "incentive stock option," as designated in the applicable Option
Agreement. "Incentive stock option" shall mean an Option intended to qualify as
            ----------------------
such within the meaning of Section 422 of the Code.

          (q) "Officer" shall mean a person who is appointed or elected by the
               -------
Board of Directors as an officer of the Company, including but not limited to a
person who is an officer within the meaning of Section 16 of the Exchange Act
and the rules and regulations promulgated thereunder.

          (r) "Option" shall mean a stock option granted pursuant to the Plan.
               ------

          (s) "Option Agreement" means a written document, the form(s) of which
               ----------------
shall be approved from time to time by the Administrator, reflecting the terms
of an Option granted under the Plan and includes any documents attached to or
incorporated into such Option Agreement, including, but not limited to, a notice
of stock option grant and a form of exercise notice.

          (t) "Optioned Stock" shall mean the Common Stock subject to an Option.
               --------------

                                      -2-
<PAGE>

          (u) "Option Exchange Program" means a program approved by the
               -----------------------
Administrator whereby outstanding Options are exchanged for Options with a lower
exercise price or are amended to decrease the exercise price as a result of a
decline in the Fair Market Value of the Common Stock.

          (v) "Optionee" shall mean an Employee or Consultant who receives an
               --------
Option.

          (w) "Parent" shall mean a "parent corporation," whether now or
               ------
hereafter existing, as defined in Section 424(e) of the Code.

          (x) "Plan" shall mean this 2000 Non-Executive Stock Option Plan.
               ----

          (y) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
               ----------
Act as the same may be amended from time to time, or any successor provision.

          (z) "Share" shall mean a share of the Common Stock, as adjusted in
               -----
accordance with Section 12 of the Plan.

          (aa) "Subsidiary" shall mean a "subsidiary corporation," whether now
                ----------
or hereafter existing, as defined in Section 424(f) of the Code.

     3.   Stock Subject to the Plan.  Subject to the provisions of Section 13 of
          -------------------------
the Plan, the maximum aggregate number of shares which may be sold under the
Plan is 1,996,188 shares of Common Stock.  The Shares may be newly authorized
but unissued, or reacquired (treasury), shares of Common Stock.  If an Option
expires or becomes unexercisable for any reason without having been exercised in
full, or is surrendered pursuant to an Option Exchange Program, the unpurchased
Shares which were subject thereto shall, unless the Plan has terminated, become
available for future grant or sale under the Plan.  However, Shares that have
actually been issued under the Plan upon exercise of an Option shall not be
returned to the Plan and shall not become available for future grant and sale
under the Plan, except that if Shares have been repurchased by the Company at
the Optionee's original purchase price in connection with termination of the
Optionee's Continuous Service Status, such Shares shall become available for
future grant and sale under the Plan.

     4.   Administration of the Plan.
          ---------------------------

          (a) Composition of Administrator.  The Plan shall be administered by
              ----------------------------
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws.  If a
Committee has been appointed pursuant to this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.  From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws.

          (b) Powers of the Administrator.  Subject to the provisions of the
              ---------------------------
Plan, and in the case of a Committee, the specific duties delegated by, or
limitations of authority imposed by, the Board to or on such Committee, the
Administrator shall have the authority, in its discretion:

              (i)     to grant Options under the Plan;

                                      -3-
<PAGE>

             (ii)     to determine, upon review of relevant information and in
accordance with Section 2(n) of the Plan, the Fair Market Value of the Common
Stock;

             (iii)    to determine the exercise price per share of Options to be
granted, which exercise price shall be determined in accordance with Section
8(a) of the Plan;

             (iv)     to determine the Employees or Consultants to whom, and the
time or times at which, Options shall be granted and the number of shares to be
represented by each Option;

             (v)      to interpret the Plan;

             (vi)     to approve forms of agreement for use under the Plan;

             (vii)    to determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the holder
thereof, modify or amend each Option;

             (viii)   to accelerate or defer (with the consent of the Optionee)
the exercise date of any Option;

             (ix)     to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted by the Administrator;

             (x)      to implement an Option Exchange Program on such terms and
conditions as the Administrator in its discretion deems appropriate, provided
that no amendment or adjustment to an Option that would materially and adversely
affect the rights of any Optionee shall be made without the prior written
consent of the Optionee;

             (xi)     to adjust the vesting of an Option held by an Employee or
Consultant as a result of a change in the terms or conditions under which such
person is providing services to the Company;

             (xii)    to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;

             (xiii)   in order to fulfil the purposes of the Plan and without
amending the Plan, to modify grants of Options to Employees or Consultants who
are foreign nationals or employed outside the United States in order to
recognize differences in local law, tax policies or customs; and

             (xiv)    to make all other decisions, determinations and
interpretation necessary or advisable for the administration of the Plan, all of
which shall be final and binding on all recipients of awards (and their
permitted transferees) granted under the Plan.

     5.   Eligibility.
          -----------

          (a) Recipients of Grants.  Options may be granted only to Employees
              --------------------
and Consultants. An Employee or Consultant who has been granted an Option may,
if he is otherwise eligible, be granted an additional Option or Options.

          (b) Type of Option.  Each Option shall be designated in the Option
              --------------
Agreement as a Nonstatutory Stock Option.

                                      -4-
<PAGE>

          (c) At-Will Relationship.  The Plan shall not confer upon any Optionee
              --------------------
any right with respect to continuation of employment or consulting relationship
with the Company, nor shall it interfere in any way with his right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.

     6.   Term of Plan.  The Plan shall become effective upon its adoption by
          ------------
the Board of Directors. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 14 of the Plan.

     7.   Term of Option. The term of each Option shall be ten (10) years from
          --------------
the date of grant thereof or such shorter term as may be provided in the Option
Agreement.

     8.   Exercise Price and Consideration.
          --------------------------------

          (a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be no less than 85% of the Fair Market Value per Share
on the date of grant.

          (b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator and may consist entirely of (1) cash, (2) check, (3)
promissory note, (4) other Shares of Common Stock which (i) either have been
owned by the Optionee for more than six (6) months on the date of surrender or
were not acquired, directly or indirectly, from the Company, and (ii) have a
fair market value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (5) delivery of a
properly executed exercise notice together with irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the exercise price, (6) any combination of such methods of
payment, or (7) such other consideration and method of payment for the issuance
of Shares to the extent permitted under the Applicable Laws.  In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company, and the Administrator may refuse to accept a particular
form of consideration at the time of any Option exercise if, in its sole
discretion, acceptance of such form of consideration is not in the best
interests of the Company at such time.

     9.   Exercise of Option.
          ------------------

          (a) Procedure for Exercise; Rights as a Stockholder.  Any Option
              -----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, consistent with the terms of the Plan and
reflected in the Option Agreement, including vesting requirements and/or
performance criteria with respect to the Company and/or the Optionee.

          An Option may not be exercised for a fraction of a Share.

          An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company.  Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a

                                      -5-
<PAGE>

stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly upon exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 12 of the
Plan.

          Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

          (b) Termination of Employment or Consulting Relationship.  In the
              ----------------------------------------------------
event of termination of an Optionee's Continuous Service Status with the
Company, such Optionee may, but only within three (3) months (or such other
period of time, not less than 30 days, as is determined by the Administrator)
after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise his Option to the extent that he was entitled to exercise it at the
date of such termination.  To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does not
exercise the Option to the extent so entitled within the time specified above,
the Option shall terminate and the Optioned Stock underlying the unexercised
portion of the Option shall revert to the Plan.  No termination shall be deemed
to occur and this Section 9(b) shall not apply if (i) the Optionee is a
Consultant who becomes an Employee, or (ii) the Optionee is an Employee who
becomes a Consultant.

          (c) Disability of Optionee.  Notwithstanding the provisions of Section
              ----------------------
9(b) above, in the event of termination of an Optionee's Continuous Service
Status as a result of Optionee's disability (including a disability within the
meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve
(12) months (or such other period of time as is determined by the Administrator)
from the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise the Option to the extent otherwise entitled to exercise it at the date
of such termination.  To the extent that Optionee was not entitled to exercise
the Option at the date of termination, or if Optionee does not exercise such
Option (to the extent so entitled) within the time specified above, the Option
shall terminate, and the Optioned Stock underlying the unexercised portion of
the Option shall revert to the Plan.

          (d) Death of Optionee. Notwithstanding the provisions of Section 9(b)
              -----------------
above, in the event of the death of an Optionee during the period of Continuous
Service Status since the date of grant of the Option, or within 30 days
following termination of the Optionee's Continuous Service Status, the Option
may be exercised, at any time within six (6) months following the date of death
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), by such Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of death or, if
earlier, the date of termination of the Optionee's Continuous Service Status.
To the extent that the Optionee was not entitled to exercise the Option at the
date of death or termination, as the case may be, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified above,
the Option shall terminate and the Optioned Stock underlying the unexercised
portion of the Option shall revert to the Plan.

          (e) Extension of Exercise Period.  The Administrator shall have full
              ----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Service
Status from the periods set forth in Sections 9(b), 9(c) and 9(d) above or in
the Option Agreement to such greater time as the Board shall deem appropriate,
provided,

                                      -6-
<PAGE>

that in no event shall such Option be exercisable later than the date of
expiration of the term of such Option as set forth in the Option Agreement.

          (f) Buy-Out Provisions.  The Administrator may at any time offer to
              ------------------
buy out for a payment in cash or Shares an Option previously granted under the
Plan, based on such terms and conditions as the Administrator shall establish
and communicate to the Optionee at the time such offer is made.

     10.  Taxes.
          -----

          (a) As a condition of the exercise of an Option granted under the
Plan, the Optionee (or in the case of the Optionee's death, the person
exercising the Option) shall make such arrangements as the Administrator may
require for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of an
Option and the issuance of Shares.  The Company shall not be required to issue
any Shares under the Plan until such obligations are satisfied.  If the
Administrator allows the withholding or surrender of Shares to satisfy a
Participant's tax withholding obligations under this Section 10 (whether
pursuant to Section 10(c), (d) or (e), or otherwise), the Administrator shall
not allow Shares to be withheld in an amount that exceeds the minimum statutory
withholding rates for federal and state tax purposes, including payroll taxes.

          (b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option.

          (c) In the case of a Optionee other than an Employee (or in the case
of an Employee where the next payroll payment is not sufficient to satisfy such
tax obligations, with respect to any remaining tax obligations), in the absence
of any other arrangement and to the extent permitted under the Applicable Laws,
the Optionee shall be deemed to have elected to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the minimum statutory amount required to be withheld.  For purposes of
this Section 10, the Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
under the Applicable Laws (the "Tax Date").
                                --------

          (d) If permitted by the Administrator, in its discretion, a Optionee
may satisfy his or her tax withholding obligations upon exercise of an Option by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a Fair Market Value determined as
of the applicable Tax Date equal to the minimum statutory amount required to be
withheld.

          (e) Any election or deemed election by a Optionee to have Shares
withheld to satisfy tax withholding obligations under Section 10(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by an Optionee under Section 10(d) above must be made on or prior
to the applicable Tax Date.

          (f) In the event an election to have Shares withheld is made by a
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the

                                      -7-
<PAGE>

Code, the Optionee shall receive the full number of Shares with respect to which
the Option is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.

     11.  Non-Transferability of Options.  The Option may not be sold, pledged,
          ------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution; provided, that the Administrator
                                                --------
may in its discretion grant transferable Options pursuant to option agreements
specifying (i) the manner in which such Options are transferable and (ii) that
any such transfer shall be subject to the Applicable Laws.  The designation of a
beneficiary by an Optionee will not constitute a transfer.  An Option may be
exercised, during the lifetime of the Optionee, only by the Optionee or a
transferee permitted by this Section 11.

     12.  Adjustments Upon Changes in Capitalization, Corporate Transaction and
          ---------------------------------------------------------------------
Other Transaction.
-----------------

          (a) Changes in Capitalization.  Subject to any required action by the
              -------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, and the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive.  Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.

          (b) Dissolution or Liquidation.  In the event of the proposed
              --------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action.  To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.

          (c) Merger or Sale of Assets.  Except as may be otherwise set forth in
              ------------------------
the Notice of Stock Option Grant or Stock Option Agreement, in the event of a
proposed sale of all or substantially all of the Company's assets or a merger of
the Company with or into another corporation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Company are
transferred to a person or persons different from the persons holding those
securities immediately prior to such transaction, each outstanding Option shall
be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or to
substitute an equivalent option, in which case such Option shall terminate upon
the consummation of the merger or sale of assets.

          For purposes of this Section 12(c), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon a merger or sale of assets, each holder of an Option would be
entitled to receive upon exercise of the award the same number and

                                      -8-
<PAGE>

kind of shares of stock or the same amount of property, cash or securities as
such holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the award at such time
(after giving effect to any adjustments in the number of Shares covered by the
Option as provided for in this Section 12); provided that if such consideration
received in the transaction is not solely common stock of the successor
corporation, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
award to be solely common stock of the successor corporation equal to the Fair
Market Value of the per Share consideration received by holders of Common Stock
in the transaction.

          (d) Certain Distributions.  In the event of any distribution to the
              ---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.

     13.  Time of Granting Options.  The date of grant of an Option shall, for
          ------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option.  Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable time
after the date of such grant.

     14.  Amendment and Termination of the Plan.
          -------------------------------------

          (a) Authority to Amend or Terminate.  The Board may at any time amend,
              -------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation (other than an adjustment pursuant to Section 12 above) shall
be made that would materially and adversely affect the rights of any Optionee
under any outstanding grant, without his or her consent.

          (b) Effect of Amendment or Termination.  No amendment or termination
              ----------------------------------
of the Plan shall materially and adversely affect Options already granted,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.

     15.  Conditions Upon Issuance of Shares. Notwithstanding any other
          ----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the Applicable Laws, with such compliance determined
by the Company in consultation with its legal counsel.  As a condition to the
exercise of an Option, the Company may require the person exercising the award
to represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by law.

     16.  Reservation of Shares.  The Company, during the term of this Plan,
          ---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.  The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.

                                      -9-
<PAGE>

     17.  Option Agreements.  Options shall be evidenced by Option Agreements in
          ----------------
such forms as the Administrator shall from time to time approve.

     18.  Information to Optionees.  The Company shall provide to each Optionee
          ------------------------
upon request, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all stockholders of the Company.

                                      -10-

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