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                       SECURITIES EXCHANGE AND COMMISSION
                            Washington, D. C.  20549
  
                                    FORM 8-K
  
                                 CURRENT REPORT
  
                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
  
        Date of Report (Date of earliest event reported):  July 18, 2000
  
                       Terayon Communication Systems, Inc.
             (Exact name of registrant as specified in its charter)
  
                                    Delaware
                 (State or other jurisdiction of incorporation)
  
          000-24647                                        77-0328533
    (Commission File No.)                    (I.R.S. Employer Identification No.)
  
                              2952 Bunker Hill Lane
                              Santa Clara, CA 95054
              (Address of principal executive offices and zip code)
  
       Registrant's telephone number, including area code: (408) 727-4400
  
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  Item 5.  Other Events
  
  Registration Statements Nos. 333-91823, 333-95357 and 333-37978
  
    Terayon Communication Systems, Inc. (the "Company") hereby amends Registration
  Statement Nos. 333-91823, 333-95357 and 333-37978 and any prospectuses and post-
  effective amendments filed thereon to revise the sections entitled Prospectus
  Summary and Risk Factors.
  
    The section entitled Prospectus Summary should be deleted and replaced with
  the following section:
  
  
                               PROSPECTUS SUMMARY
  
     As used in this offering memorandum, unless the context otherwise requires,
  "we," "us," "our," "Company" or "Terayon" refers to Terayon Communication
  Systems, Inc., the issuer of the Notes, and its subsidiaries. The following
  summary contains basic information about us and this offering. It likely does
  not contain all the information that is important to you. For a more complete
  understanding of this offering, we encourage you to read this entire offering
  memorandum and the documents to which we have referred you.
  
                                      Terayon
  
  Our Business
  
     We develop, market and sell broadband access systems that enable cable
  operators and other providers of broadband access services to cost effectively
  deploy reliable broadband access services over cable, copper wire utilizing
  digital subscriber line technology (or DSL) and wireless systems. We have
  substantial development and marketing resources focused on cable operators.
  However, through internal development and recent acquisitions of complementary
  technology and businesses, we also are focusing on service providers that offer
  broadband access through existing copper wire infrastructures and wireless
  systems.
  
     In recent years, the volume of bandwidth-intensive data, voice and video
  traffic across existing cable infrastructure, the Internet, corporate intranets
  and other public networks has increased dramatically. International Data
  Corporation estimates that the number of worldwide Internet users will increase
  from approximately 200 million at the end of 2000 to more than one billion by
  the end of 2005. IDC estimates that the number of homes in the United States
  with broadband access will increase from two million at the end of 1999 to 20
  million by the end of 2003. As a result of the rapid evolution of broadband
  access, cable operators, providers of telephone services and other service
  providers are providing a bundle of voice, data and video services to their
  residential and commercial subscribers over existing and new infrastructures.
  
     Our objective is to be the leading provider of broadband access systems to
  providers of broadband services that use existing cable, copper wire (DSL) and
  wireless networks to offer services to residential and commercial customers.
  Key elements of our strategy include the following:
  
    .  Build a complete portfolio of broadband products;
  
    .  Supply leading broadband service providers worldwide;
  
    .  Increase our presence in existing and new markets;
  
    .  Extend technology leadership and advance industry standards; and
  
    .  Provide superior customer support.
  
     Our primary product is the TeraComm system, which is based on our patented
  Synchronous Code Division Multiple Access or "S-CDMA" technology. Our S-CDMA
  technology enables reliable two-way broadband data communications over both
  pure coaxial and hybrid fiber/coax cable infrastructure and is designed to
  enable cable operators to maximize the capacity and reliability of broadband
  data services over any cable plant. In furtherance of our strategy to provide
  a complete portfolio of broadband products, we have
  
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  recently completed several acquisitions of complementary broadband
  technologies, including digital video management systems, DSL and wireless.
  
     We sell our broadband access products to cable operators and other providers
  of broadband access services through direct sales forces in North America,
  South America, Europe and Asia. We also distribute our products via
  distributors and systems integrators. Companies currently using or distributing
  our TeraComm system include Rogers Communications, Inc., Shaw Communications,
  Inc., TCA Cable TV, Inc. (a subsidiary of Cox Communications, Inc.), United
  Pan-Europe Communications and Crossbeam Networks Corporation, a wholly owned
  subsidiary of Sumitomo Corporation. Companies currently using our DSL products
  include major ILEC's (Incumbent Local Exchange Carriers) in the United States,
  including SBC, Bell Atlantic, Bell South, U.S. West and GTE.
  
     Our company was incorporated in California in January 1993 and
  reincorporated in Delaware in July 1998. Our executive offices are located at
  2952 Bunker Hill Lane, Santa Clara, California 95054 and our telephone number
  is (408) 727-4400. Our Web site is located at www.terayon.com. Information
  contained on our Web site does not constitute part of this offering memorandum.
  
  Recent Events
  
     We believe that the following transactions, in combination with our own
  internal development and previous acquisitions, significantly increase our
  technological expertise throughout broadband access technologies including
  cable modems, DSL and wireless broadband access:
  
    .  In January 2000, we acquired Telegate Ltd., a manufacturer of telephony
       and data access platforms that are deployed by service providers to
       deliver efficient carrier-class voice services over cable. Telegate also
       provides in-home networking capability for telephony and data, based on
       the Digital Enhanced Cordless Telephony (DECT) standard.
  
    .  In April 2000, we acquired the Access Network Electronics Division (ANE)
       of Tyco Electronics Corporation, a subsidiary of Tyco International Ltd.
       ANE produces DSL systems that allow for the provisioning of multiple
       phone lines over the existing copper telephony networks consisting of a
       single pair of copper wires that traditionally only support a single
       phone line.
  
    .  In April 2000, we acquired Combox, Ltd., a manufacturer of broadband
       data systems and satellite communications based on international
       standards. Combox's cable data access systems conform to the growing
       EuroModem international specification, based on the Digital Video
       Broadcasting (DVB) standard.
  
    .  In April 2000, we purchased certain assets of Internet Telecom Ltd., a
       supplier of PacketCable and other standards-based, voice-over-IP
       ("Internet Protocol") systems and technologies.
  
    .  In April 2000, we acquired Ultracom Communication Holdings (1995) Ltd.
       ("Ultracom"), a supplier of wireless DSL and broadband systems on
       silicon.
  
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    The section entitled Risk Factors should be deleted and replaced with the
  following section:
  
  
                                    RISK FACTORS
  
     Before making an investment decision, you should carefully consider the risks
  described below. The risks and uncertainties described below are not the only
  ones facing our company. Additional risks and uncertainties not presently known
  to us or that we currently deem immaterial also may impair our business
  operations. If any of the following risks actually occur, our business could be
  harmed. In such case, the trading price of our common stick could decline, and
  you may lose all or part of your investment.
  
                           Risks Related to Our Business
  
  We have a limited operating history and a history of losses.
  
     We have a limited operating history, and it is difficult to predict our
  future operating results. We began shipping products commercially in June 1997,
  and we only have been shipping products in volume since the first quarter of
  1998. As of March 31, 2000, we had an accumulated deficit of $176.8 million. We
  believe that we will continue to experience net losses for the foreseeable
  future. Most of our expenses are fixed in advance, and we generally are unable
  to reduce our expenses significantly in the short term to compensate for any
  unexpected delay or decrease in anticipated revenues. We expect to continue to
  increase expenses for the foreseeable future to support increased sales and
  marketing and technical support costs. Any significant delay in our anticipated
  revenues or commercialization of new products would harm our business. The
  revenue and profit potential of our business and our industry are unproven. We
  had negative gross margins from our inception until the fourth quarter of 1998,
  and any future revenue growth may not result in positive gross margins or
  operating profits in future periods.
  
  Our operating results may fluctuate.
  
     Our quarterly revenues are likely to fluctuate significantly in the future
  due to a number of factors, many of which are outside our control. Factors that
  could affect our revenues include the following:
  
    .  variations in the timing of orders and shipments of our products;
  
    .  variations in the size of the orders by our customers;
  
    .  new product introductions by competitors;
  
    .  delays in our introduction of new products;
  
    .  delays in our receipt of orders forecasted by our customers;
  
    .  delays by our customers in the completion of upgrades to their cable
       infrastructure;
  
    .  variations in capital spending budgets of broadband access service
       providers;
  
    .  adoption of industry standards and the inclusion in or compatibility of
       our technology with any such standards; and
  
    .  delays in obtaining regulatory approval for commercial deployment of
       cable modem systems.
  
     Our expenses generally will vary from quarter to quarter depending on the
  level of actual and anticipated business activities. Research and development
  expenses will vary as we begin development of new products and as our
  development programs move to wafer fabrication and prototype development, which
  results in higher engineering expenses.
  
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     A variety of factors affect our gross margin, including the following:
  
    .  the sales mix of our products;
  
    .  the volume of products manufactured;
  
    .  the type of distribution channel through which we sell our products;
  
    .  the average selling prices or "ASPs" of our products; and
  
    .  the effectiveness of our cost reduction measures.
  
     We anticipate that unit ASPs of our products will decline in the future.
  This could cause a decrease in the gross margins for these products. In
  addition, the maturity of TeraComm system deployments affects our gross margin.
  New deployments of the TeraComm system involve the sale of headend equipment
  (which has higher margins) and generally involve smaller quantities of product.
  New deployments typically are sold at higher margins than the larger volume
  sales of product associated with more mature deployments of the TeraComm
  system. The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways
  and TeraPro cable modems also affects our gross margin. The TeraPro cable
  modems have significantly lower margins than the TeraLink 1000 Master
  Controller and TeraLink Gateway headend products. We expect to achieve
  significantly lower margins on the TeraPro cable modems for the foreseeable
  future. Further, we expect that sales of TeraPro cable modems will continue to
  constitute a significant portion of our revenues for the foreseeable future.
  
     We also anticipate that our operating results will be impacted by sales,
  gross profit and operating expenses of acquired companies. The impact of these
  factors on our operating results will vary as we acquire additional companies.
  
  We are dependent on a small number of customers.
  
     Four customers accounted for approximately 64% of our revenues for the
  quarter ended March 31, 2000 and three customers accounted for approximately
  63% of our revenues for the quarter ended March 31, 1999. We believe that a
  substantial majority of our revenues will continue to be derived from sales to
  a relatively small number of customers for the foreseeable future. In addition,
  we believe that sales to these customers will be focused on a limited number of
  projects.
  
     The cable industry is undergoing significant consolidation in North America
  and internationally, and a limited number of cable operators controls an
  increasing number of cable systems. Currently, ten cable operators in the
  United States own and operate facilities passing approximately 86% of total
  homes passed. In addition, the North American DSL market is concentrated with
  the major ILECs, constituting a significant percentage of the market. As a
  result, our sales will be largely dependent upon product acceptance by the
  leading broadband service providers. Currently, the timing and size of each
  customer's order is critical to our operating results. Our major customers are
  likely to have significant negotiating leverage and may attempt to change the
  terms, including pricing, upon which we do business with them. These customers
  also may require longer payment terms than we anticipate, which could require
  us to raise additional capital to meet our working capital requirements.
  
  Acquisitions could result in dilution, operating difficulties and other adverse
  consequences.
  
     We have acquired seven businesses since September 1999: Imedia Corporation
  in September 1999; Radwiz in November 1999; Telegate in January 2000; ANE in
  April 2000; ComBox in April 2000; some assets of Internet Telecom in April
  2000; and Ultracom in April
  
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  2000. If appropriate opportunities present themselves, we intend to acquire
  additional businesses, technologies, services or products that we believe are
  strategic. The process of integrating any acquired business into our business
  and operations is risky and may create unforeseen operating difficulties and
  expenditures. The areas in which we may face difficulties include:
  
    .  diversion of management time (both ours and that of the acquired
       companies) during the period of negotiation through closing and after
       closing from the ongoing development of our businesses, issues of
       integration and future products;
  
    .  decline in employee morale and retention issues resulting from changes
       in compensation, reporting relationships, future prospects or the
       direction of the business;
  
     We typically sell products to our customers pursuant to purchase orders, and
  we therefore generally do not have long-term agreements in place with our
  customers.
  
    .  the need to integrate each company's accounting, management information,
       human resource and other administrative systems to permit effective
       management, and the lack of control if this integration is delayed or
       not implemented; and
  
    .  the need to implement controls, procedures and policies appropriate for
       a larger public group of companies that prior to acquisition had been
       smaller, private companies.
  
     We have very limited experience in managing this integration process.
  Moreover, the anticipated benefits of any or all of these completed or pending
  acquisitions may not be realized. Future acquisitions could result in
  potentially dilutive issuances of equity securities, the incurrence of
  additional debt, contingent liabilities or amortization expenses related to
  goodwill and other intangible assets, any of which could harm our business.
  Future acquisitions also could require us to obtain additional equity or debt
  financing, which may not be available on favorable terms or at all. Even if
  available, this financing may be dilutive.
  
  The sales cycle for our products is lengthy.
  
     The sales cycle associated with our products typically is lengthy, often
  lasting six months to a year. Our customers typically conduct significant
  technical evaluations of competing technologies prior to the commitment of
  capital and other resources. In addition, purchasing decisions may be delayed
  because of our customers' internal budget approval procedures. Sales also
  generally are subject to customer trials, which typically last three months.
  Because of the lengthy sales cycle and the large size of customers' orders, if
  orders forecasted for a specific customer for a particular quarter do not occur
  in that quarter, our operating results for that quarter could suffer.
  
  There are many risks associated with our participation in the establishment of
  advanced physical layer specifications to be added to DOCSIS.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2 (Data Over
  Cable Service Interface Specifications), an enhanced version of the DOCSIS
  cable modem specification based in part on our S-CDMA technology. In September
  1999, CableLabs indicated that it intended to proceed with the advanced
  physical layer ("PHY") work on two parallel tracks: one for the development of
  a prototype based on our S-CDMA technology and
  
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  one for the inclusion of Advanced TDMA technology (Time Division Multiple
  Access), as proposed by other companies. In February 2000, CableLabs further
  clarified the status of the advanced PHY project regarding a separate release
  that will include TDMA technologies. In addition, CableLabs reiterated that it
  is continuing to work with us on the development of a DOCSIS specification that
  could include our S-CDMA technology. To that end, CableLabs has requested that
  we submit a prototype of a DOCSIS system that incorporates an S-CDMA advanced
  PHY capability for testing. CableLabs has stated that if the testing of this
  prototype reveals that the S-CDMA advanced PHY works as claimed (including
  proper backwards compatibility and coexistence with the other aspects of
  DOCSIS), and if the costs for adding S-CDMA to DOCSIS products are in line with
  estimates, then it is likely, but not certain, that S-CDMA advanced PHY
  capabilities will be included in a future version of the DOCSIS specification.
  The prototype we submit to CableLabs may fail to demonstrate the level of
  performance that CableLabs seeks; even if it does meet performance expectations
  there can be no guarantee that CableLabs will incorporate the technology into a
  future version of DOCSIS specifications. In addition, if CableLabs does proceed
  to include S-CDMA in a future DOCSIS specification, there can be no guarantee
  that the DOCSIS S-CDMA specification will be the same as the specification we
  incorporated in the prototype submitted for tests, which may require us to
  further develop our prototype.
  
     Our future revenues and operating results are likely to suffer if S-CDMA is
  not included in a future release of DOCSIS. We also may incur substantial
  additional research and development expenditures to adapt our specifications to
  the version adopted by CableLabs. CableLabs has not established a schedule for
  adding the S-CDMA capabilities to the DOCSIS specifications. Delays in the
  establishment of a final specification for S-CDMA in DOCSIS could harm our
  plans to sell DOCSIS compatible modems and headend equipment. In particular, if
  the final DOCSIS S-CDMA specification is not approved prior to the time when we
  are ready to ship DOCSIS products with S-CDMA features included, then we may be
  required to delay the introduction of those products until the DOCSIS S-CDMA
  specification is released or to introduce the S-CDMA features as proprietary
  enhancements to a standard DOCSIS product. Either one of these events could
  harm revenues and operating results.
  
     We have already given CableLabs assurances that we will contribute some
  aspects of our proprietary S-CDMA technology to a royalty-free intellectual
  property pool, if S-CDMA is included in a future version of DOCSIS
  specifications. This royalty-free pool has been established by CableLabs to
  facilitate the participation of as many vendors as possible in providing
  equipment that is compatible with the DOCSIS specifications. As a result, any
  of our competitors who join the DOCSIS intellectual property pool would have
  access to some aspects of our technology and would not be required to pay us
  any royalties or other compensation. If a competitor is able to duplicate the
  functionality and capabilities of our technology, we could lose some or all of
  the time-to-market advantage we might otherwise have, which could harm our
  future revenues and operating results.
  
     We believe the addition of advanced upstream PHY capabilities to DOCSIS will
  increase the overall market for DOCSIS-compatible products, and as such will
  result in increased competition in the cable modem market. This competition
  could come from existing competitors or from new competitors who enter the
  market as a result of the enhancements to the specifications. This increased
  competition is likely to result in lower ASPs of cable modem systems and could
  harm revenues and gross margins. Because our competitors will be able to
  incorporate some aspects of our technology into their products, our current
  customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
  cable modems with advanced PHY capabilities from multiple suppliers. We may be
  unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
  more quickly or at lower cost than
  
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  our competitors. The inclusion of our S-CDMA technology in future DOCSIS
  specification could result in increased competition for the services of our
  existing employees who have experience with S-CDMA. The loss of these employees
  to one or more competitors could harm our business.
  
     DOCSIS standards have not yet been accepted in Europe and Asia. An alternate
  standard for cable modem systems, called the EuroModem standard, or DAVIC/DVB,
  has been formalized, and some European cable system operators have embraced it.
  We intend to develop and sell products that comply with the EuroModem standard
  and to pursue having portions of our S-CDMA technology included in a future
  version of the EuroModem standard. We may be unsuccessful in these efforts.
  
  We need to develop new products in order to remain competitive.
  
     Our future success will depend in part on our ability to develop, introduce
  and market new products in a timely manner. We also must respond to competitive
  pressures, evolving industry standards and technological advances. Our current
  S-CDMA products are not DOCSIS-compliant. We are currently developing a
  prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY
  capability for testing and eventual inclusion in the DOCSIS standard. There is
  no guarantee that we will be successful in developing the prototype or that the
  prototype, if successfully developed, will be included in a future release of
  the DOCSIS standard. We anticipate that during 2000, existing or potential
  customers may delay purchases of our TeraComm system in order to purchase
  systems that comply with the DOCSIS standard. In addition, potential new
  customers could decide to purchase DOCSIS-compliant products from one or more
  of our competitors rather than from us. As a result, our product sales in the
  second half of 2000 may be lower than we anticipate. In order to promote sales
  of our currents products we may be required to reduce our prices for sales to
  existing customers. This would harm our operating results and gross margin.
  
     As a result of the inclusion of TDMA technology in the new DOCSIS version
  announced by CableLabs in February 2000, we will have to incorporate advanced
  TDMA technology into our DOCSIS-compliant products. If we are unable to do this
  effectively, or in a timely manner, we will lose some or all of the time-to-
  market advantage we might otherwise have had.
  
     Our future success will also depend on our ability to develop and market
  products for broadband applications over DSL and wireless networks. The markets
  for these broadband applications are also subject to evolving standards, such
  as NEBS compliance in the North American DSL market, and technological advances
  in these arenas. There is no guarantee that we will be successful in developing
  products that are compliant with these standards or that we will be successful
  in keeping pace with future technological advances in this arena.
  
  Average selling prices of broadband access equipment typically decrease.
  
     The broadband access systems market has been characterized by erosion of
  average selling prices. We expect this to continue. This erosion is due to a
  number of factors, including competition, rapid technological change and price
  performance enhancements. The ASPs for our products may be lower than expected
  as a result of competitive pricing pressures, our promotional programs and
  customers who negotiate price reductions in exchange for longer term purchase
  commitments. We anticipate that ASPs and gross margins for our products will
  decrease over product life cycles. In addition, we believe that the widespread
  adoption of industry standards is likely to further erode ASPs, particularly
  for cable modems and other similar consumer premise equipment. It is likely
  that the widespread adoption of industry standards will result in increased
  retail distribution of cable modems and other similar
  
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  consumer premise equipment, which could put further price pressure on our
  products. Decreasing ASPs could result in decreased revenue even if the number
  of units sold increases. As a result, we may experience substantial period-to-
  period fluctuations in future operating results due to ASP erosion. Therefore,
  we must continue to develop and introduce on a timely basis next-generation
  products with enhanced functionalities that can be sold at higher gross
  margins. Our failure to do this could cause our revenues and gross margin to
  decline.
  
  We must achieve cost reductions.
  
     Certain of our competitors currently offer products at prices lower than
  ours. Market acceptance of our products will depend in part on reductions in
  the unit cost of our products. We expect that as headend equipment becomes more
  widely deployed, the price of cable modems and other similar consumer premise
  equipment will decline. In particular, we believe that the widespread adoption
  of industry standards such as DOCSIS will cause increased price competition for
  consumer premise equipment. However, we may be unable to reduce the cost of our
  products sufficiently to enable us to compete with other suppliers. Our cost
  reduction efforts may not allow us to keep pace with competitive pricing
  pressures or lead to gross margin improvement.
  
     Some of our competitors are larger and manufacture products in significantly
  greater quantities than we intend to for the foreseeable future. Consequently,
  these competitors have more leverage in obtaining favorable pricing from
  suppliers and manufacturers. In order to remain competitive, we must
  significantly reduce the cost of manufacturing our cable modems through design
  and engineering changes. We may not be successful in redesigning our products.
  Even if we are successful, our redesign may be delayed or may contain
  significant errors and product defects. In addition, any redesign may not
  result in sufficient cost reductions to allow us to significantly reduce the
  list price of our products or improve our gross margin. Reductions in our
  manufacturing costs will require us to use more highly integrated components in
  future products and may require us to enter into high volume or long-term
  purchase or manufacturing agreements. Volume purchase or manufacturing
  agreements may not be available on acceptable terms. We could incur expenses
  without related revenues if we enter into a high volume or long-term purchase
  or manufacturing agreement and then decide that we cannot use the products or
  services offered by such agreement.
  
  We must keep pace with rapid technological change to remain competitive.
  
     The markets for our products are characterized by rapid technological
  change, evolving industry standards, changes in end-user requirements and
  frequent new product introductions and enhancements. Our future success will
  depend upon our ability to enhance our existing products and to develop and
  introduce new products that achieve market acceptance. Providers of broadband
  access services may adopt alternative technologies or they may deploy
  alternative services that are incompatible with our products.
  
     The demand for broadband access services has resulted in the development of
  several competing modulation technologies. For example, some of our cable
  products utilize a modulation technology known as S-CDMA, while several of our
  competitors utilize modulation technologies known as TDMA and Frequency
  Division Multiple Access or "FDMA." Our headend equipment and cable modem
  products currently are not interoperable with the headend equipment and modems
  of other suppliers of broadband access products. As a result, potential
  customers who wish to purchase broadband access products from multiple
  
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  suppliers may be reluctant to purchase our products. Although our technology
  may be incorporated into a future version of a DOCSIS specification or another
  industry standard, we cannot be certain that major cable operators will adopt
  these standards. Major cable operators may not adopt products or technologies
  based on our current proprietary S-CDMA technology or on any future industry
  standard S-CDMA technology. Further, major cable operators may adopt products
  or standards technologies based on competing modulation technologies. If
  competitors using other modulation technologies can incorporate functionality
  and capabilities currently found in S-CDMA, the value of our S-CDMA technology
  would be diminished.
  
  Broadband access services have not achieved widespread market acceptance, and
  many competing technologies exist.
  
     Our success will depend upon the widespread commercial acceptance of
  broadband access services by service providers and end users of broadband
  access services. The market for these services is not fully developed. We
  cannot accurately predict the future growth rate or the ultimate size of the
  market for broadband access services. Potential users of our products may have
  concerns regarding the security, reliability, cost, ease of installation and
  use and capability of broadband access services in general.
  
     The market for our products may be impacted by the development of other
  technologies that enable the provisioning of broadband access services and the
  deployment of services over other media. Widespread acceptance of other
  technologies or deployment of services over media not supported by our products
  could materially limit acceptance of our broadband access systems. Broadband
  access services based on our products and technology may fail to gain
  widespread commercial acceptance by providers of broadband access services and
  end users. In addition, we only recently began to offer products based on
  alternate technologies such as DSL. We may not be successful in marketing and
  selling these products.
  
  We need to develop additional distribution channels.
  
     We presently market our TeraComm system to cable operators and systems
  integrators. We believe that much of the North American cable modem market may
  shift to a retail distribution model. Accordingly, we may need to redirect our
  future marketing efforts to sell our cable modems directly to retail
  distributors and end users. This shift would require us to establish new
  distribution channels for our products. We may be unable to establish these
  additional distribution channels. If we do establish them, we may be unable to
  hire the additional personnel necessary to foster and enhance such distribution
  channels. In addition, if the cable modem market shifts to a retail
  distribution model, we may not successfully establish a retail distribution
  presence. To the extent that large consumer electronics companies enter the
  cable modem market, their well-established retail distribution capabilities
  would provide them with a significant competitive advantage.
  
  We may be unable to market effectively to broadband access service providers.
  
     Our growth and future success will be substantially dependent upon our
  ability to convince providers of broadband access services to adopt our
  technologies, purchase our products and effectively market our products to end
  users. Our potential customers are likely to prefer purchasing products from
  established manufacturing companies that can demonstrate the capability to
  supply large volumes of products on short notice. In addition, many of our
  potential customers may be reluctant to adopt technologies that have not gained
  acceptance among other providers of similar services. This reluctance could
  result in lengthy product testing and acceptance cycles for our products.
  Consequently, the impediments to our initial sales may be even greater than
  those to later sales.
  
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     No established distribution network in the cable modem industry exists that
  would provide us with easy access to smaller or geographically diverse cable
  operators. Therefore, our initial sales to larger, more established cable
  operators are critical to our business. Although we intend to establish
  strategic relationships with leading distributors worldwide, we may not succeed
  in establishing these relationships. Even if we do establish these
  relationships, the distributors may not succeed in marketing our products to
  cable operators. Some of our competitors have already established relationships
  with certain cable operators. These established relationships may further limit
  our ability to sell products to those cable operators. We do not have long,
  well-established relationships with those cable operators. If we were to sell
  our products to those cable operators, it would likely not be based on long-
  term contracts and those customers would be able to terminate their
  relationships with us at any time. In addition, one or more of our current
  customers could cancel its relationship with us at any time.
  
     We have recently begun marketing and selling our products to providers of
  DSL and wireless broadband services and thus we have very limited experience.
  We do not have long, well-established relationships with these providers, and
  we may not be successful in establishing these relationships.
  
  We are dependent on broadband service providers choosing to offer additional
  services to their customers.
  
     We depend on cable operators to purchase our cable modem systems and to
  provide our cable modems to end users. Cable operators have a limited amount of
  available bandwidth over which they can offer robust data services, and they
  may not choose to provide these data services to their customers. If cable
  operators choose to provide these services, we also will depend upon them to
  market these services to cable customers, to install our equipment and to
  provide support to end users. In addition, we will be highly dependent on cable
  operators to continue to maintain their cable infrastructure in a manner that
  allows us to provide consistently high performance and reliable services. Our
  success also will depend upon the acceptance of our products by other providers
  of services to the cable industry, such as Excite@Home's @Home Network and Road
  Runner, a joint venture between MediaOne Group, Inc. and Time Warner Cable.
  Sales of our DSL and wireless products are also dependent on service providers
  choosing to purchase our products and to provide additional services to their
  end users.
  
  Sales of our cable products are dependent on the cable industry upgrading to
  two-way cable infrastructure.
  
     Demand for our products will depend, to a significant degree, upon the
  magnitude and timing of capital spending by cable operators for implementation
  of access systems for data transmission over cable networks. This involves the
  enabling of two-way transmission over existing coaxial cable networks and the
  eventual upgrade to HFC in areas of higher penetration of data services. If
  cable operators fail to complete these upgrades of their cable infrastructures
  in a timely and satisfactory manner, the market for our products could be
  limited. In addition, few businesses in the United States currently have cable
  access. Cable operators may not choose to upgrade existing residential cable
  systems or to install new cable systems to serve business locations.
  
     The success and future growth of our business will be subject to economic
  and other factors affecting the cable television industry generally,
  particularly its ability to finance substantial capital expenditures. Capital
  spending levels in the cable industry in the United
  
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  States have fluctuated significantly in the past, and we believe that such
  fluctuations will occur in the future. The capital spending patterns of cable
  operators are dependent on a variety of factors, including the following:
  
    .  the availability of financing;
  
    .  cable operators' annual budget cycles, as well as the typical reduction
       in upgrade projects during the winter months;
  
    .  the status of federal, local and foreign government regulation and
       deregulation of the telecommunications industry;
  
    .  overall demand for cable services;
  
    .  competitive pressures (including the availability of alternative data
       transmission and access technologies);
  
    .  discretionary consumer spending patterns; and
  
    .  general economic conditions.
  
     In recent periods, the United States cable market has been characterized by
  the acquisition of smaller and independent cable operators by large cable
  operators. We cannot predict the effect, if any, that consolidation in the
  United States cable industry will have on overall capital spending patterns by
  cable operators. The effect on our business of further industry consolidation
  also is uncertain.
  
  Supply of our products may be limited by our ability to forecast demand
  accurately.
  
     The emerging nature of the broadband access services market makes it
  difficult for us to accurately forecast demand for our products. Our inability
  to accurately forecast the actual demand for our products could result in
  supply, manufacturing or testing capacity constraints. These constraints could
  result in delays in the delivery of our products or the loss of existing or
  potential customers, either of which could have a negative impact on our
  business, operating results or financial condition. In addition, we had
  unconditional purchase obligations of approximately $125.7 million as of March
  31, 2000, primarily to purchase minimum quantities of materials and components
  used to manufacture our products. We must fulfill these obligations even if
  demand for our products is lower than we anticipate.
  
  We are dependent on key third-party suppliers.
  
     We manufacture all of our products using components or subassemblies
  procured from third-party suppliers. Some of these components are available
  from a single source and others are available from limited sources. All of our
  sales are from products containing one or more components that are available
  only from single supply sources. In addition, some of the components are custom
  parts produced to our specifications. For example, we currently rely on Philips
  Semiconductors, Inc. to supply a custom ASIC that is used in our products.
  Other components, such as the radio frequency tuner and some surface acoustic
  wave filters, are procured from sole source suppliers. Any interruption in the
  operations of vendors of sole source parts could adversely affect our ability
  to meet our scheduled product deliveries to customers. We are dependent on
  semiconductor manufacturers and are affected by worldwide conditions in the
  semiconductor market. If we are unable to obtain a sufficient supply of
  components from our current sources, we could experience difficulties in
  obtaining alternative sources or in altering product designs to use alternative
  components. Resulting delays or reductions in product shipments could damage
  customer relationships. Further, a significant increase in the price of one or
  more of these components could harm our gross margin or operating results.
  
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  <PAGE>
  
  Shortages in supplies of components may impair our ability to meet customer
  demands.
  
     Due to increasing demand for electronic and communications equipment, the
  worldwide market for component parts is currently constrained. Delays in key
  component or product deliveries may occur due to shortages resulting from a
  limited number of suppliers, the financial or other difficulties of such
  suppliers or a limitation in component product availability. Due to these
  current market conditions, we face the risk of possible shortages of certain
  key components that could result in product performance shortfalls and reduced
  control over or delay in delivery schedules, manufacturing capability, quality
  and costs, all of which could impair our ability to produce enough product to
  meet our customer demand. In addition, in order to fulfill demand for our
  products, we may have to purchase these components on the spot market at a
  price that may be higher than we have experienced in the past.
  
     Although we work closely with our suppliers to avoid these types of
  shortages, there can be no assurance that we will not encounter these problems
  in the future. While our suppliers have performed effectively and been
  relatively flexible to date, we believe that we will be faced with the
  following challenges going forward:
  
    .  New markets in which we participate may grow quickly and consume
       component capacity; and
  
    .  As we continue to acquire companies and new technologies, we are
       dependent, at least initially, on unfamiliar supply chains or relatively
       small supply partners.
  
     Manufacturing capacity and component supply constraints could be significant
  issues for us. If we were unable to obtain adequate quantities of significant
  component materials on a timely basis, our business and our customer
  relationships would be adversely affected. If we are unable to satisfy our
  customers' demand, our customers could decide to purchase products from our
  competitors. Inability to meet demand, or a decision by one or more of our
  customers to purchase from our competitors, could harm our operating results.
  
  We may be unable to migrate to new semiconductor process technologies
  successfully or on a timely basis.
  
     Our future success will depend in part upon our ability to develop products
  that utilize new semiconductor process technologies. These technologies change
  rapidly and require us to spend significant amounts on research and
  development. We continuously evaluate the benefits of redesigning our
  integrated circuits using smaller geometry process technologies to improve
  performance and reduce costs. The transition of our products to integrated
  circuits with increasingly smaller geometries will be important to our
  competitive position. Other companies have experienced difficulty in migrating
  to new semiconductor processes and, consequently, have suffered reduced yields,
  delays in product deliveries and increased expense levels. Moreover, we depend
  on our relationship with our third-party manufacturers to migrate to smaller
  geometry processes successfully.
  
  Our ability to directly control product delivery schedules and product quality
  is dependent on third-party contract manufacturers.
  
     Most of our products are assembled and tested by contract manufacturers
  using testing equipment that we provide. As a result of our dependence on these
  contract manufacturers for assembly and testing of our products, we do not
  directly control product delivery schedules or product quality. Any product
  shortages or quality assurance problems could increase the costs of
  manufacture, assembly or testing of our products. In addition, as manufacturing
  volume increases, we will need to procure and assemble additional testing
  equipment and provide it
  
                                         13
  
  <PAGE>
  
  to our contract manufacturers. The production and assembly of testing equipment
  typically requires significant time. We could experience significant delays in
  the shipment of our products if we are unable to provide this testing equipment
  to our contract manufacturers in a timely manner.
  
  There are many risks associated with international operations.
  
     Sales to customers outside of the United States accounted for approximately
  84% of our revenues in 1999 and approximately 74% of our revenues in 1998. We
  expect sales to customers outside of the United States to continue to represent
  a significant percentage of our revenues for the foreseeable future.
  International sales are subject to a number of risks, including the following:
  
    .  changes in foreign government regulations and communications standards;
  
    .  export license requirements, tariffs and taxes;
  
    .  other trade barriers;
  
    .  difficulty in protecting intellectual property;
  
    .  difficulty in collecting accounts receivable;
  
    .  difficulty in managing foreign operations; and
  
    .  political and economic instability.
  
     If our customers are affected by currency devaluations or general economic
  crises, such as the recent economic crisis affecting many Asian and Latin
  American economies, their ability to purchase our products could be reduced
  significantly. Payment cycles for international customers typically are longer
  than those for customers in the United States. Foreign markets for our products
  may develop more slowly than currently anticipated. Foreign countries may
  decide not to construct cable infrastructure or may prohibit, terminate or
  delay the construction of new cable plants for a variety of reasons. These
  reasons include environmental issues, economic downturns, the availability of
  favorable pricing for other communications services or the availability and
  cost of related equipment. Any action like this by foreign countries would
  reduce the market for our products.
  
     We anticipate that our foreign sales generally will be invoiced in U.S.
  dollars, and we currently do not plan to engage in foreign currency hedging
  transactions. However, as we commence and expand our international operations,
  we may be paid in foreign currencies and exposure to losses in foreign currency
  transactions may increase. We may choose to limit our exposure by the purchase
  of forward foreign exchange contracts or through similar hedging strategies. No
  currency hedging strategy can fully protect against exchange-related losses. In
  addition, if the relative value of the U.S. dollar in comparison to the
  currency of our foreign customers should increase, the resulting effective
  price increase of our products to those foreign customers could result in
  decreased sales.
  
  We may be unable to provide adequate customer support.
  
     Our ability to achieve our planned sales growth and retain current and
  future customers will depend in part upon the quality of our customer support
  operations. Our customers generally require significant support and training
  with respect to our broadband access systems, particularly in the initial
  deployment and implementation stages. To date our sales have been concentrated
  in a small number of customers. We have limited experience with widespread
  deployment of our products to a diverse customer base. We may not have
  
                                         14
  
  <PAGE>
  
  adequate personnel to provide the levels of support that our customers may
  require during initial product deployment or on an ongoing basis. Our inability
  to provide sufficient support to our customers could delay or prevent the
  successful deployment of our products. In addition, our failure to provide
  adequate support could harm our reputation and relationship with our customers
  and could prevent us from gaining new customers.
  
  Our industry is highly competitive with many established competitors.
  
     The market for broadband access systems is extremely competitive and is
  characterized by rapid technological change. Our direct competitors in the
  cable access systems arena include Cisco Systems, Com21, General Instrument,
  Matsushita Electric Industrial (which markets products under the brand name
  "Panasonic"), Motorola, Nortel Networks, Vyyo, Thomson Consumer Electronics
  (which markets products under the brand name "RCA"), Samsung, Scientific-
  Atlanta, Sony, 3Com, Toshiba and Zenith Electronics. We also compete with
  companies that develop integrated circuits for broadband access products, such
  as Broadcom, Conexant and Texas Instruments. We also sell products that compete
  with existing data access and transmission systems utilizing the
  telecommunications networks, such as those of 3Com. Additionally, our
  controller and headend system products face intense competition from well-
  established companies such as Cisco, Nortel and 3Com. In addition, we compete
  with companies in the DSL arena such as ECI, Charles Industries, Pairgain,
  Copper Mountain, Accelerated Networks, Integral Access and VINA Technologies.
  As standards, such as DOCSIS, are developed for broadband access systems, other
  companies may enter the broadband access systems market. The principal
  competitive factors in our market include the following:
  
    .  product performance, features and reliability;
  
    .  price;
  
    .  size and stability of operations;
  
    .  breadth of product line;
  
    .  sales and distribution capability;
  
    .  technical support and service;
  
    .  relationships with providers of broadband access services; and
  
    .  compliance with industry standards.
  
     Some of these factors are outside of our control. The existing conditions in
  the broadband access market could change rapidly and significantly as a result
  of technological advancements. The development and market acceptance of
  alternative technologies could decrease the demand for our products or render
  them obsolete. Our competitors may introduce broadband access products that are
  less costly, provide superior performance or achieve greater market acceptance
  than our products.
  
     Many of our current and potential competitors have significantly greater
  financial, technical, marketing, distribution, customer support and other
  resources, as well as greater name recognition and access to customers than we
  do. The anticipated widespread adoption of DOCSIS and other industry standards
  is likely to cause increased worldwide price competition, particularly in the
  North American market. The adoption of DOCSIS and these other standards also
  could result in lower sales of our TeraComm system, including the higher margin
  headend products. Any increased price competition or reduction in sales of our
  headend products would result in downward pressure on our gross margin. We
  cannot accurately predict how the competitive pressures that we face will
  affect our business.
  
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  <PAGE>
  
  Our business is dependent on the Internet and the development of the Internet
  infrastructure.
  
     Our success will depend in large part on increased use of the Internet to
  increase the need for high speed broadband access networks. Critical issues
  concerning the commercial use of the Internet remain largely unresolved and are
  likely to affect the development of the market for our products. These issues
  include security, reliability, cost, ease of access and quality of service. Our
  success also will depend on the growth of the use of the Internet by
  businesses, particularly for applications that utilize multimedia content and
  thus require high bandwidth. The recent growth in the use of the Internet has
  caused frequent periods of performance degradation. This has required the
  upgrade of routers, telecommunications links and other components forming the
  infrastructure of the Internet by Internet service providers and other
  organizations with links to the Internet. Any perceived degradation in the
  performance of the Internet as a whole could undermine the benefits of our
  products. Potentially increased performance provided by our products and the
  products of others ultimately is limited by and reliant upon the speed and
  reliability of the Internet backbone itself. Consequently, the emergence and
  growth of the market for our products will depend on improvements being made to
  the entire Internet infrastructure to alleviate overloading and congestion.
  
  Our failure to manage growth could adversely affect us.
  
     The growth of our business has placed, and is expected to continue to place,
  a significant strain on our limited personnel, management and other resources.
  Our management, personnel, systems, procedures and controls may be inadequate
  to support our existing and future operations. To manage any future growth
  effectively, we will need to attract, train, motivate, manage and retain
  employees successfully, to integrate new employees into our overall operations
  and to continue to improve our operational, financial and management systems.
  
  We are dependent on key personnel.
  
     Due to the specialized nature of our business, we are highly dependent on
  the continued service of, and on the ability to attract and retain qualified
  engineering, sales, marketing and senior management personnel. The competition
  for personnel is intense. The loss of any of these individuals, particularly
  our Chairman, President and Chief Technical Officer, Shlomo Rakib, and our
  Chief Executive Officer, Zaki Rakib, would harm our business. In addition, if
  we are unable to hire additional qualified personnel as needed, we may be
  unable to adequately manage and complete our existing sales commitments and to
  bid for and execute additional sales. Further, we must train and manage our
  growing employee base, which is likely to require increased levels of
  responsibility for both existing and new management personnel. Our current
  management personnel and systems may be inadequate, and we may fail to
  assimilate new employees successfully.
  
     Highly skilled employees with the education and training that we require,
  especially employees with significant experience and expertise in both data
  networking and radio frequency design, are in high demand. We may not be able
  to continue to attract and retain the qualified personnel necessary for the
  development of our business. We do not have "key person" insurance coverage for
  the loss of any of our employees. Any officer or employee of our company can
  terminate his or her relationship with us at any time. Our employees generally
  are not bound by non-competition agreements with us.
  
  Our business is subject to the risks of product returns, product liability and
  product defects.
  
     Products as complex as ours frequently contain undetected errors or
  failures, especially when first introduced or when new versions are released.
  Despite testing, errors may occur.
  
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  The occurrence of errors could result in product returns and other losses to
  our company or our customers. This occurrence also could result in the loss of
  or delay in market acceptance of our products. Due to the recent introduction
  of our products, we have limited experience with the problems that could arise
  with this generation of products. However, the limitation of liability
  provision contained in our purchase agreements may not be effective as a result
  of federal, state or local laws or ordinances or unfavorable judicial decisions
  in the United States or other countries. We have not experienced any product
  liability claims to date, but the sale and support of our products entails the
  risk of such claims. In addition, any failure by our products to properly
  perform could result in claims against us by our customers. We maintain
  insurance to protect against certain claims associated with the use of our
  products, but our insurance coverage may not adequately cover any claim
  asserted against us. In addition, even claims that ultimately are unsuccessful
  could result in our expenditure of funds in litigation and management time and
  resources.
  
  We may be unable to adequately protect or enforce our intellectual property
  rights.
  
     We rely on a combination of patent, trade secret, copyright and trademark
  laws and contractual restrictions to establish and protect proprietary rights
  in our products. Our pending patent applications may not be granted. Even if
  they are granted, the claims covered by the patents may be reduced from those
  included in our applications. Any patent might be subject to challenge in court
  and, whether or not challenged, might not be broad enough to prevent third
  parties from developing equivalent technologies or products without taking a
  license from us. We have entered into confidentiality and invention assignment
  agreements with our employees, and we enter into non-disclosure agreements with
  some of our suppliers, distributors and appropriate customers so as to limit
  access to and disclosure of our proprietary information. These statutory and
  contractual arrangements may not prove sufficient to prevent misappropriation
  of our technology or to deter independent third-party development of similar
  technologies. In addition, the laws of some foreign countries might not protect
  our products or intellectual property rights to the same extent as do the laws
  of the United States. Protection of our intellectual property might not be
  available in every country in which our products might be manufactured,
  marketed or sold.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
  version of the DOCSIS cable modem specification based in part on our S-CDMA
  technology. In September 1999, CableLabs indicated that it intended to proceed
  with the advanced PHY work on two parallel tracks: one for the development of a
  prototype based on our S-CDMA technology and one for the inclusion of Advanced
  TDMA technology, as proposed by other companies. In February 2000, CableLabs
  further clarified the status of the advanced PHY project regarding a separate
  release that will include TDMA technologies. In addition, CableLabs reiterated
  that it is continuing to work with us on the development of a DOCSIS
  specification that could include our S-CDMA technology. To that end, we have
  indicated to CableLabs that we would contribute some aspects of our S-CDMA
  technology to the DOCSIS intellectual property pool if and when a DOCSIS
  specification is approved that includes our S-CDMA technology.
  
     We would contribute our technology pursuant to a license agreement with
  CableLabs that we would execute at that time, and which contains the terms that
  CableLabs has established for the inclusion of any intellectual property from
  any source in the DOCSIS specifications. Under the terms of the proposed
  license agreement, we would grant to CableLabs a royalty-free license for those
  aspects of our S-CDMA technology that are essential for compliance with the
  DOCSIS cable modem standard. So-called "implementation know how" is not covered
  by this license-only those aspects of the technology that are essential to
  implementing a
  
                                         17
  
  <PAGE>
  
  compliant product. CableLabs would have the right to extend royalty-free
  sublicenses to companies that wish to build DOCSIS-compatible products. These
  sublicenses would allow participating companies to utilize and incorporate the
  essential portions of the S-CDMA technology on a royalty-free basis for the
  limited use of making and selling products or systems that comply with the
  DOCSIS cable modem specification. Terayon has already joined the DOCSIS
  intellectual property pool and, as a result, we have a royalty-free sublicense
  that allows us to ship DOCSIS-compatible products which contain intellectual
  property submitted by other companies. The scope of this license would not
  extend to the use of the S-CDMA technology in other areas; only for products
  that comply with the DOCSIS specifications. As a result, any of our competitors
  who join or have joined the DOCSIS intellectual property pool will have access
  to some aspects of our technology without being required to pay us any
  royalties or other compensation. If and when we submit S-CDMA to the DOCSIS
  Intellectual Property pool, we are in no way restricted from entering into
  royalty-bearing license agreements with companies that wish to use the S-CDMA
  technology for purposes other than implementing DOCSIS compatible products, or
  that do not wish to enter into the DOCSIS intellectual property pool. Further,
  some of our competitors have been successful in reverse engineering the
  technology of other companies, and the inclusion of S-CDMA in a future DOCSIS
  specification would expose some aspects of our technology to those competitors.
  DOCSIS specifications are available on an open basis once they are approved,
  not only to companies that are members of the DOCSIS IP Pool. If a competitor
  is able to duplicate the functionality and capabilities of our technology, we
  could lose all or some of the time-to-market advantage we might otherwise have.
  Under the terms of the proposed license agreement, if we sue certain parties to
  the proposed license agreement on claims of infringement of any copyright or
  patent right or misappropriation of any trade secret, those parties may
  terminate our license to the patents or copyrights they contributed to the
  DOCSIS intellectual property pool. If a termination like this were to occur, we
  would continue to have access to some aspects of the DOCSIS intellectual
  property pool, but we would not be able to develop products that fully comply
  with the DOCSIS cable modem specification. Also, even if we were to be removed
  from the IP pool, we would not be prevented from developing and selling
  products that fully comply with the DOCSIS specifications, but we would not be
  able to do this with the benefit of a royalty-free license, which would
  increase the cost of our products, assuming we were able to obtain a license
  agreement for the required technology. Because of these terms, we may find it
  difficult to enforce our intellectual property rights against certain
  companies, even in areas that are not directly related to DOCSIS specifications
  and products.
  
     We anticipate that developers of cable modems increasingly will be subject
  to infringement claims as the number of products and competitors in our
  industry segment grows. We have received letters from two individuals claiming
  that our technology infringes patents held by these individuals. We have
  reviewed the allegations made by these individuals and, after consulting with
  our patent counsel, we do not believe that our technology infringes any valid
  claim of these individuals' patents. If the issues are submitted to a court,
  the court could find that our products infringe these patents. In addition,
  these individuals may continue to assert infringement. If we are found to have
  infringed these individuals' patents, we could be subject to substantial
  damages and/or an injunction preventing us from conducting our business. In
  addition, other third parties may assert infringement claims against us in the
  future. An infringement claim, whether meritorious or not, could be time-
  consuming, result in costly litigation, cause product shipment delays or
  require us to enter into royalty or licensing agreements. These royalty or
  licensing agreements may not be available on terms acceptable to us or at all.
  Litigation also may be necessary to enforce our intellectual property rights.
  
     We pursue the registration of our trademarks in the United States and have
  applications pending to register several of our trademarks. However, the laws
  of certain foreign countries
  
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  <PAGE>
  
  might not protect our products or intellectual property rights to the same
  extent as the laws of the United States. This means that effective trademark,
  copyright, trade secret and patent protection might not be available in every
  country in which our products might be manufactured, marketed or sold.
  
  Our business is subject to communications industry regulations.
  
     Our business and our customers are subject to varying degrees of federal,
  state and local regulation. The jurisdiction of the Federal Communications
  Commission extends to the communications industry, including our broadband
  access products. The FCC has promulgated regulations that, among other things,
  set installation and equipment standards for communications systems. Although
  FCC regulations and other governmental regulations have not materially
  restricted our operations to date, future regulations applicable to our
  business or our customers could be adopted by the FCC or other regulatory
  bodies. For example, FCC regulatory policies affecting the availability of
  cable services and other terms on which cable companies conduct their business
  may impede our penetration of certain markets. In addition, regulation of cable
  television rates may affect the speed at which cable operators upgrade their
  cable infrastructures to two-way HFC. In addition, the increasing demand for
  communications systems has exerted pressure on regulatory bodies worldwide to
  adopt new standards for such products and services. This process generally
  involves extensive investigation of and deliberation over competing
  technologies. The delays inherent in this governmental approval process have in
  the past, and may in the future, cause the cancellation, postponement or
  rescheduling of the installation of communications systems by our customers.
  
     If other countries begin to regulate the cable modem industry more heavily
  or introduce standards or specifications with which our products do not comply,
  we will be unable to offer products in those countries until our products
  comply with those standards or specifications. In addition, we may have to
  incur substantial costs to comply with those standards or specifications. For
  instance, should the DAVIC standards for ATM-based digital video be established
  internationally, we will need to conform our cable modems to compete. Further,
  many countries do not have regulations for installation of cable modem systems
  or for upgrading existing cable network systems to accommodate our products.
  Whether we currently operate in a country without these regulations or enter
  into the market in a country these regulations do not exist, new regulations
  could be proposed at any time. The imposition of regulations like this could
  place limitations on a country's cable operators' ability to upgrade to support
  our products. Cable operators in these countries may not be able to comply with
  these regulations, and compliance with these regulations may require a long,
  costly process. For example, we experienced delays in product shipments to a
  customer in Brazil due to delays in certain regulatory approvals in Brazil.
  Similar delays could occur in other countries in which we market or plan to
  market our products. In addition, our customers in certain parts of Asia, such
  as Japan, are required to obtain licenses prior to selling our products, and
  delays in obtaining required licenses could harm our ability to sell products
  to these customers.
  
  Our business is subject to other regulatory approvals and certifications.
  
     In the United States, in addition to complying with FCC regulations, our
  products are required to meet certain safety requirements. For example, we are
  required to have our products certified by Underwriters Laboratory in order to
  meet federal requirements relating to electrical appliances to be used inside
  the home. Outside the United States, our products are subject to the regulatory
  requirements of each country in which the products are manufactured or sold.
  These requirements are likely to vary widely. We may be unable to obtain on a
  timely basis or at all the regulatory approvals that may be required for the
  
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  manufacture, marketing and sale of our products. In addition to regulatory
  compliance, some cable industry participants may require certification of
  compatibility.
  
  We are vulnerable to earthquakes and other natural disasters.
  
     The facility housing our corporate headquarters, the majority of our
  research and development activities and our in-house manufacturing operations
  is located in an area of California known for seismic activity. In addition,
  the operations of some of our key suppliers are also located in this area and
  in other areas know for seismic activity, such as Taiwan. An earthquake, or
  other significant natural disaster, could result in an interruption in our
  business or that of one or more of our key suppliers. Such an interruption
  could harm our operating results.
  
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  Forms 10(K) and 10(Q)
  
    The Company hereby amends Form 10-K filed on March 30, 2000 and Form 10-Q
  filed on May 15, 2000 and any amendments filed thereon to revise the sections,
  where applicable, entitled Business, Management's Discussion and Analysis of
  Financial Condition and Results of Operations and Certain Business Risk.
  
    The section entitled Business should be deleted and replaced with the
  following section:
  
  
                                      BUSINESS
  
  Overview
  
     We develop, market and sell broadband access systems that enable cable
  operators and other providers of broadband access services to cost effectively
  deploy reliable broadband access services over cable, copper wire utilizing DSL
  and wireless systems. We have substantial development and marketing resources
  focused on cable operators. However, through internal development and recent
  acquisitions of complementary technology and businesses, we also are focusing
  on service providers that offer broadband access through existing copper wire
  infrastructures and wireless systems.
  
     Our primary product is the TeraComm system, which is based on our patented
  S-CDMA technology. Our S-CDMA technology enables reliable two-way broadband
  data communications over both pure coaxial and hybrid fiber/coax cable
  infrastructure and is designed to enable cable operators to maximize the
  capacity and reliability of broadband data services over any cable plant. In
  furtherance of our strategy to provide a complete portfolio of broadband
  products, we have recently completed several acquisitions of complementary
  broadband technologies, including digital video management systems, DSL and
  wireless.
  
     We sell our broadband access products to cable operators and other providers
  of broadband access services through direct sales forces in North America,
  South America Europe and Asia. We also distribute our products via distributors
  and systems integrators. Companies currently using or distributing our TeraComm
  system include Rogers, Shaw, TCA Cable TV (a subsidiary of Cox Communications,
  Inc.), UPC and Crossbeam, a wholly owned subsidiary of Sumitomo. Companies
  currently using our DSL products include major ILEC's (Incumbent Local Exchange
  Carriers) in the U.S. including SBC, Bell Atlantic, Bell South, U.S. West and
  GTE.
  
  Industry Background
  
   Demand for Broadband Access
  
     In recent years, the volume of bandwidth intensive data, voice and video
  traffic across cable infrastructures, the Internet, corporate intranets and
  other public networks has increased dramatically. This demand has been driven
  by the proliferation of residential and commercial users that are accessing
  networks for a variety of applications, including voice, video and data
  communication via the Internet, electronic commerce, telecommuting and
  interactive television. For example, International Data Corporation, estimates
  that the number of worldwide Internet users will increase from approximately
  200 million at the end of 2000 to over one billion by the end of 2005. IDC
  estimates that the number of homes in the United States with broadband access
  will increase from two million at the end of 1999 to 20 million by the end of
  2003. The rapid evolution of broadband has resulted in cable operators,
  providers of telephone services and other service providers seeking to provide
  a bundle of voice, data and video services to their residential and commercial
  subscribers over existing and new infrastructures.
  
     Despite significant advances in the performance of computer processors and
  data backbone networks, high speed data transmission has been limited by the
  existing local access network infrastructure (also known as the last mile),
  which is not optimized for distribution of data-intensive multimedia content.
  Users of dial-up analog modems with
  
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  <PAGE>
  
  maximum data rates of only 56 Kbps often experience frustration, as they
  encounter frequent and lengthy delays or complete failures in transmission. In
  response to the growing demand for increased bandwidth, service providers are
  now deploying new broadband access technologies, such as DSL, cable modems and
  wireless devices, that can deliver performance that is from 50 to 100 times
  faster than analog modems. According to industry analysts, the market for
  broadband access equipment is expected to increase from approximately
  $4 billion at the end of 1999 to approximately $11 billion in 2004.
  
   Emergence of Broadband Technologies
  
     As residential and commercial demand for increased bandwidth and faster
  access continues to grow, particularly for applications such as streaming audio
  and video, IP telephony and interactive two-way video, service providers are
  investing in enabling infrastructure and technologies. Various technologies
  have emerged to address the need for broadband access across cable, copper wire
  and wireless platforms or networks.
  
     Cable operators market high speed cable modems that use the existing
  television cable plant to provide subscribers access to the Internet, digital
  video, telephony and other broadband services. Similarly, telephone companies
  offer comparable services using DSL technology over the existing copper wire
  infrastructure. Wireless operators also are establishing high speed Internet
  access using both terrestrial and satellite systems to connect subscribers to
  voice, video and data services.
  
     The competition between cable operators, telephone companies and emerging
  wireless service providers is expected to intensify as the demand for broadband
  access grows. Cable operators benefit from the fact that the cable
  infrastructure passes over 95% of the homes in the United States and a large
  number of small businesses. In addition, the cable infrastructure has the
  potential to offer a wide range of broadband services, such as digital TV,
  Internet access and IP telephony. Similarly, DSL providers benefit from the
  fact that existing copper lines reach a substantial majority of U.S. homes.
  Wireless, in contrast, does not depend on existing cable or telephone line
  infrastructure and can be quickly deployed in homes and businesses that
  otherwise might not have broadband access, particularly for international
  markets. Although the market for broadband access services is becoming
  increasingly competitive, industry analysts expect each platform to experience
  significant growth over the next five years.
  
   Challenges in Deploying Broadband Access Services
  
     Service providers must overcome numerous challenges in order to successfully
  meet the increasing demand for broadband access services. Among other things,
  these service providers must do the following:
  
    .  provide end-users with a broad range of bundled services;
  
    .  capitalize on available bandwidth to provide a variety of services;
  
    .  rapidly deploy services to their customers; and
  
    .  provide reliable and cost-effective access.
  
  The Terayon Solution
  
     Our products are designed to enable cable operators and other providers of
  broadband access services to cost-effectively deploy reliable broadband
  services over cable, DSL and wireless systems. Until recently, our development
  and marketing efforts were focused
  
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  <PAGE>
  
  primarily on cable operators. As a result of some recent acquisitions of
  complementary technology and businesses, we also are focusing on providers of
  broadband services using existing telephone, DSL and wireless systems.
  
     Our products offer cable operators and other broadband providers the
  following advantages:
  
     Enable enriched set of bundled services.  Our broadband access platforms are
  designed to enable service providers to deliver a broad range of voice, video
  and data services over either a cable, DSL or wireless network. Service
  providers are able to reduce their total network costs because they can deliver
  additional services without investing in separate network infrastructures. In
  addition, because our broadband access platforms facilitate the bundling of
  voice, video and data services, service providers are better able to increase
  their revenues and differentiate themselves by offering tailored services and a
  single point of contact to customers.
  
     Maximize bandwidth utilization. Our broadband access platforms allow cable
  operators, telecommunications carriers and other providers of broadband
  services to optimize utilization of the available bandwidth for data access,
  digital video, and voice services. For example, through our proprietary S-CDMA
  technology, cable operators can maximize the use of the upstream return path
  using the lowest frequency ranges of the upstream spectrum, where noise is
  typically too severe to operate. This use of the upstream spectrum is key to
  delivering efficient interactive data services. Our Cherrypicker digital video
  management systems allow cable operators to flexibly manage bandwidth by
  allowing them to customize digital video programming for their target
  demographics.
  
     Enable rapid time to market of new services. Our broadband access products
  are designed to enable service providers to achieve rapid time to market and
  offer additional voice, video and data services as they become available, by
  leveraging existing plant and infrastructure. The rapid deployment of broadband
  services is a key competitive advantage to our customers.
  
     Provide reliable and cost effective solutions. Our solutions are designed to
  provide a high degree of reliability in a cost-effective manner. Our cable
  modem system allows cable operators to deploy data services over a wide variety
  of plant conditions, thus reducing ongoing maintenance costs and minimizing
  service problems. Due to their reliability, our DSL systems enable service
  providers to deliver mission-critical services, such as toll-quality local and
  long distance voice over DSL to their customers. Wireless systems are the most
  cost-effective means for delivering broadband access services to customers who
  cannot otherwise access existing cable and telephone infrastructure,
  particularly in rural areas and developing countries.
  
  Strategy
  
     Our objective is to be the leading provider of broadband systems to cable
  operators, providers of telephone services and other service providers seeking
  to provide broadband services to residential and commercial end users. Key
  elements of our strategy are as follows:
  
     Build a complete portfolio of broadband products. We are building a complete
  portfolio of broadband products to support high speed delivery of voice, video
  and data services over cable, copper wire and wireless infrastructures through
  internal development efforts and strategic acquisitions. Until recently our
  internal development efforts have focused on developing our proprietary S-CDMA
  technology for cable modems and extending this technology to a standards-based
  environment. Our future development efforts will be focused on the development
  of new technologies for the delivery of voice, video and data over any
  
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  <PAGE>
  
  broadband medium. In furtherance of this strategy, during the last year we have
  made several acquisitions of broadband technologies including digital video
  management systems, DSL and wireless.
  
     Supply leading broadband service providers worldwide. We target the largest
  broadband service providers in each major geographic area worldwide. Three of
  the largest North American cable operators, Rogers, Shaw and TCA Cable TV (a
  subsidiary of Cox Communications, Inc.) are deploying our TeraComm cable modem
  system. In Japan, through our partner Sumitomo, we have established ourselves
  as a market leader. In Europe, Our TeraComm system is being deployed by UPC,
  one of Europe's largest broadband communications companies. We market our DSL
  products to leading providers of telephony services throughout the world. The
  acquisition of ANE provides us with a strong customer presence in the U.S.
  communications market. Our customers include the major U.S. ILECs (Incumbent
  Local Exchange Carriers), including SBC, Bell Atlantic, Bell South, U.S. West
  and GTE.
  
     Increase presence in existing and new markets. We intend to increase our
  presence in new and existing markets throughout North America, Europe, Asia and
  South America. We currently sell our products in over 20 countries worldwide.
  As part of our effort to increase our market penetration and to capitalize on
  new opportunities, we plan to continue to expand our sales, marketing and
  customer support capabilities through both our direct sales and marketing staff
  as well as our relationships with distributors. We believe that a physical
  presence in key customer locations provides an important advantage in
  developing and maintaining our new and existing customer relationships.
  
     Extend technology leadership and advance industry standards. A significant
  element of our strategy is to advance industry standards and to extend our
  technology leadership through the development of innovative new technologies.
  We intend to leverage our engineering capabilities to expand the features and
  functionality of broadband products. We will strive to use our technology
  leadership to achieve a significant time-to-market advantage over competing
  broadband access suppliers by offering advanced features, such as IP telephony
  and videoconferencing. In addition, we intend to apply S-CDMA to additional
  applications such as wireless communications and Local Multipoint Distribution
  Systems. We will continue to participate in industry standards organizations
  and activities for DOCSIS, DVB, MPEG and PacketCable.
  
     Provide superior customer service and support. We believe that our ability
  to provide consistent high quality service and support is a key factor in
  attracting and retaining customers. We provide our customers with technical
  support and training through customer support representatives and
  representatives of distributors. We offer service and support to our customers
  24 hours a day, seven days a week.
  
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  <PAGE>
  
  Products
  
     Our current portfolio of products complements our strategy to be the leading
  provider of broadband systems to cable television operators, providers of
  telephone services and other service providers seeking to provide broadband
  access services to residential and commercial users.
  
  <TABLE>
  <CAPTION>
       Product Family     Product
       --------------     ---------------------------------------------
       <S>                <C>
       Cable Systems      Terayon S-CDMA Products
  
                          TeraLink 1000 S-CDMA Master Controller
                          TeraLink S-CDMA Gateway
                          TeraPro S-CDMA Cable Modem
                          TeraView Network Management Software
  
                          Terayon DOCSIS Products
  
                          TeraLink 2000 DOCSIS CMTS
                          TeraJet DOCSIS Cable Modem
  
                          Terayon DVB Cable Products
  
                          UCMT-2000 Interactive Network Adaptor
                          UCM-220 Cable Modem
                          HAS-2000 High Availability Server
  
                          Multigate Telephony System
  
       Video Systems      CherryPicker 500
                          CherryPicker 7000
                          CherryPicker 1000
                          CherryPicker AdSplicer
  
       DSL Systems        Miniplex DSL Systems
                          IPTL Converged Voice and Data Services System
                          Highlink
  
       Wireless Products  SatStream--Satellite modem
                          NetStream--Broadband Satellite IP Gateway
                          WebStream--Broadband Satellite IP Gateway
                          HAS-2000--High Availability Server
  </TABLE>
  
   Cable Systems
  
     Our TeraComm system enables cable operators to cost-effectively deploy
  reliable two-way broadband access services. The TeraComm system is comprised of
  the TeraPro cable modem, the TeraLink 1000 Master Controller, the TeraLink
  Gateway and the TeraView Element Management and Provisioning Software. The
  price of a TeraComm system is dependent on a number of variables, including a
  customer's basic cable system architecture, the type of routing equipment a
  customer intends to use, the level and quality of service that a cable operator
  desires to provide and the volume of products purchased by a customer.
  
     TeraPro Cable Modem. The TeraPro cable modem is a data communications device
  installed in a subscriber's home or business. The TeraPro cable modem connects
  to the subscriber's PC via a standard 10BaseT Ethernet connector and to the
  cable network via a
  
                                         25
  
  <PAGE>
  
  standard coaxial cable connector. The TeraPro cable modem automatically
  configures itself without user intervention, thus minimizing modem installation
  time. In addition, the configuration software for the TeraPro cable modem is
  downloaded remotely, allowing centralized software upgrades directly from the
  headend management system.
  
     The TeraPro cable modem delivers full two-way communication over the cable
  network, with data rates of up to 14 Mbps per 5 MHz channel in both the
  upstream and the downstream direction. The TeraPro cable modem operates at full
  capacity at an SNR as low as 13dB, and gradually adjusts throughput to provide
  transmission at an SNR as low as -13dB. This feature will permit the TeraPro
  cable modem to operate across any portion of the 5 to 42 MHz upstream RF
  spectrum.
  
     TeraLink 1000 Master Controller. The TeraLink 1000 Master Controller is a
  data channel controller and multiplexer located at the cable headend system or
  distribution hub. The TeraLink 1000 Master Controller provides control,
  management and data transport functions for TeraPro cable modems connected to
  the cable network. It offers dynamic bandwidth management, high speed traffic
  concentration, access control to data networking resources and data service
  quality and integrity.
  
     The TeraLink 1000 Master Controller is a single channel, rack-mountable
  controller that supports up to 2,000 cable modems per channel. Additional
  TeraLink 1000 Master Controllers can be added to scale service as performance
  and subscriber needs grow. The TeraLink 1000 Master Controller, with the
  TeraLink Gateway, provides a 100 BaseT interface for direct connectivity to a
  private backbone or any vendor's router or switch. Alternatively, the TeraLink
  1000 Master Controller, with its built-in ATM OC-3 interface, can be connected
  via an ATM switch, or directly to Cisco's 7500 series routers.
  
     TeraLink Gateway. The TeraLink Gateway is a rack-mountable edge concentrator
  providing end-user clients with broadband access to a remote IP backbone (e.g.,
  Internet) as well as efficient communication between modems. The TeraLink
  Gateway includes an ATM OC-3 interface for connectivity to up to two TeraLink
  1000 Master Controllers or an ATM switch. It also provides a 10/100 BaseT
  Ethernet/Fast Ethernet auto-sense interface to a headend backbone or any IP
  router including the Cisco Universal Broadband Router. The TeraLink Gateway
  also includes a separate 10 BaseT interface, which may be connected to a
  separate management network or the headend network. The TeraLink Gateway
  supports up to 2,000 cable modems per RF channel when connected to a TeraLink
  1000 Master Controller. When used with the TeraLink Gateway, the TeraPro cable
  modems behave as an extension of the TeraLink Gateway, providing maximum
  bandwidth and privacy.
  
     TeraView Element Management and Provisioning Software. The TeraView Element
  Management and Provisioning Software is a Windows 95 and Windows NT standards-
  based software application installed at the headend system or the network
  operations center. The TeraView software allows cable operators to configure,
  control, monitor and maintain multiple channels of the TeraComm system.
  
     Multigate Telephony and Data Access Systems. We produce telephony and data
  access systems for deployment of efficient carrier-class voice services over
  cable. Our systems also provide in-home networking capability for telephony and
  data, based on the Digital Enhanced Cordless Telephony ("DECT") standard. Our
  systems support voice, high-speed data, and Integrated Service Digital Network
  ("ISDN") services for the business telecommuting market and the SOHO market.
  
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  <PAGE>
  
   Video Systems
  
     CherryPicker Digital Video Management Systems. CherryPicker Digital Video
  Management Systems are scalable, open platforms that enable cable, satellite
  and terrestrial operators to deliver customized digital programming. Patented
  statistical re-multiplexing technology gives operators ultimate control over
  programming and allows them to create customized video of programming by
  selecting feeds (grooming) from a vast array of sources. The CherryPicker helps
  operators maximize their available bandwidth while enabling them to provide
  program offerings that target specific local demographics.
  
   DSL Systems
  
     Digital Subscriber Line Systems (xDSL). We produce communications access
  systems based on high-speed IP routing, integrated with telephony. Our
  innovative systems include both central office DSLAMs (Digital Subscriber Line
  Access Multiplexers) and customer premise equipment for SOHO business broadband
  services. These systems deliver high- capacity, symmetric voice and data
  services to the business market, with high density port aggregation at the
  central office site for maximum cost efficiency.
  
   Wireless Products
  
     Our wireless products provide high-speed Internet connectivity to the
  subscriber's PC via a standard digital television services antenna. Our
  SatStream Satellite modem offers residential and commercial subscribers with
  connectivity to the Internet via satellite digital television services.
  
  Customers
  
     We market our products to providers of broadband access services that seek
  to provide broadband access services to both residential and commercial end
  users. Our target market is the largest broadband service providers in each
  major geographic area worldwide.
  
     Our principal customers for cable, DSL and wireless systems include the
  following:
  
  <TABLE>
  <CAPTION>
       Cable                                   DSL
       -----                                   ---
       <S>                                     <C>
       Rogers                                  SBC
       Shaw                                    Bell Atlantic
       TCA Cable TV                            Bell South
         (a subsidiary of Cox Communications)  U.S. West
       Crossbeam                               GTE
         (a subsidiary of Sumitomo)
       UPC
  
  <CAPTION>
       Digital Video Systems                   Wireless Systems
       ---------------------                   ----------------
       <S>                                     <C>
       Cox Communications                      Shiron
       Time Warner                             Teleo
       Adelphia                                Gilat Sat
                                               KBI e-Sat
                                               Adaptive
  </TABLE>
  
     Four customers accounted for approximately 64% of our revenues for the
  quarter ended March 31, 2000. We believe that a substantial majority of our
  revenues will continue to be derived from sales to a relatively small number of
  customers for the foreseeable future. In addition, we believe that sales to
  these customers will be focused on a small number of projects.
  
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  <PAGE>
  
  Research and Development
  
     We believe that our future success will depend on our ability to enhance our
  existing products and to develop and introduce new products that meet a wide
  range of evolving broadband access service providers and end user needs. In
  addition, to address competitive and pricing pressures, we expect that we will
  have to reduce the unit cost of manufacturing our products through design and
  engineering changes.
  
     We currently are designing and developing a DOCSIS system that includes S-
  CDMA advanced PHY capabilities, which will include a cable modem and an
  accompanying headend controller. These products are in the early stages of
  development and we do not anticipate commercial availability of these products
  until late 2000 or early 2001. We also are developing a common multimedia
  platform for current and advanced transmission of data, voice and video over
  existing broadband infrastructures, including cable, DSL and wireless. These
  products are in the early stages of development, and we do not anticipate
  commercial availability of these products until late 2001.
  
     On March 18, 1999, we entered into a one-year Product Development Assistance
  Agreement ("Development Agreement") with Rogers. Under the terms of the
  Development Agreement, Rogers is obligated to provide assistance with the
  characterization and testing of our subscriber-end and head-end voice-over-
  cable equipment. In addition, Rogers is obligated to provide technology to
  assist us in connection with our efforts to develop high quality, field proven
  technology solutions that are DOCSIS-compliant and PacketCable-compliant.
  
  Sales and Marketing
  
     We have direct sales forces in North America, South America, Europe and
  Asia. We also distribute our products via distributors and systems integrators.
  We have signed a distribution agreement with Sumitomo under which Crossbeam is
  distributing the TeraComm system to several of Japan's leading cable operators.
  In January 2000, we signed a distribution agreement with BARCO Communication
  Systems, for the sale of our CherryPicker systems to cable television operators
  worldwide. In June 2000, we signed a distribution agreement with NEC, for the
  sale of our IPTL DSL access system throughout Asia and Central and South
  America.
  
     We market our products directly to providers of broadband access services
  through our sales force, key distribution and technology partners, as well as
  other marketing vehicles such as industry press, trade shows and the Web.
  Through our marketing efforts, we strive to educate providers on the
  technological and business benefits of our system solution, as well as our
  ability to provide quality support and service to the customer. We participate
  in the major trade shows and industry events for the broadband access industry
  in the United States and we are expanding our presence in other markets through
  joint participation at local events with our international sales and marketing
  partners. Industry referrals and reference accounts are significant marketing
  tools we develop and utilize.
  
  Customer Service and Technical Support
  
     We believe that our ability to provide consistently high quality service and
  support will be a key factor in attracting and retaining customers. Our TSS
  (Technical Services and Support) organization, located in North America,
  Europe, South America and Asia, offers support 24 hours a day, seven days per
  week. Prior to deployment of our systems, each customer's needs
  
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  <PAGE>
  
  are assessed and proactive solutions are implemented, including various levels
  of training, periodic management and coordination meetings, and problem
  escalation procedures. We place a strong emphasis on technical training for our
  customers. Initial training is offered at no cost, both at our headquarters in
  Santa Clara and on our customers' premises.
  
     In addition to our TSS organization, we have developed sophisticated tools
  for remote diagnosis and monitoring of the TeraComm systems deployed by cable
  operators. These tools allow us to monitor cable operators' installations of
  the TeraLink 1000 Master Controller to suggest solutions proactively before
  problems become noticeable to end users. We are developing a Web-based
  knowledge system to provide cable operators with access to the latest technical
  support information.
  
  Manufacturing
  
     We outsource the majority of the materials procurement, printed circuit
  board assembly, and product assembly and testing to turnkey contract
  manufacturers. Currently, we contract with Solectron, located in Milpitas,
  California, and CalComp Electronics, located in Thailand, for the manufacture
  of the majority of our products. In addition, we also manufacture our products
  at subcontractors located in the U.S. and Israel. We have a limited in-house
  manufacturing capability at our Santa Clara headquarters. This facility
  currently is used for the assembly and final testing of TeraLink 1000 Master
  Controllers and TeraLink Gateways. We also use this facility for pilot
  production of new product designs, sample testing of products received from
  volume manufacturers, developing the manufacturing process and documentation
  for new products in preparation for outsourcing. We also perform repair
  operations for some of our products returned from customers with our in-house
  manufacturing resources.
  
     Our future success will depend in significant part on our ability to obtain
  high volume manufacturing at low costs. As volume increases, we plan to engage
  additional contract manufacturers, to procure additional manufacturing
  facilities and equipment, to modify existing inventory procedures, to
  substantially increase our personnel and to revise our quality assurance and
  testing practices.
  
     Subcontractors supply our contract manufacturers with both standard
  components and subassemblies manufactured to our specifications. We depend upon
  certain key suppliers for a number of the components for our products. For
  example, we currently rely on Philips Semiconductor, Inc. (formerly VLSI
  Technology, Inc.) for our S-CDMA ASIC, which is used in our headend and cable
  modem products. In addition, all of our products contain one or more components
  that currently only are available from a single source.
  
  Competition
  
     The market for broadband access systems is extremely competitive and is
  characterized by rapid technological change. Our direct competitors in the
  cable modem arena include Cisco, Com21, Matsushita, Motorola, Nortel, Vyyo,
  RCA, Samsung, Scientific-Atlanta, Sony, 3Com, Toshiba and Zenith, and there are
  many other potential market entrants. We also sell products that compete with
  existing data access and transmission systems utilizing the telecommunications
  networks, such as those of 3Com. Additionally, our controller and headend
  system products face intense competition from well-established companies such
  as Cisco, Nortel and 3Com. Our direct competitors in the DSL arena include ECI
  Telecom, Charles Industries, ADC, Copper Mountain, Accelerated Networks,
  Integral Access and VINA Technologies. Our direct competitors in the video
  arena are Cisco and Harmonic, while our direct competitors in the voice arena
  are Nortel, TelLabs, ADC and Alcatel. Our direct competitors in wireless are
  Hughes, Marconi, NEC and Scientific-Atlanta.
  
                                         29
  
  <PAGE>
  
     The principal competitive factors in the broadband access market include
  product performance, features and reliability, price, size and stability of
  operations, breadth of product line, sales and distribution capability,
  technical support and service, relationships with providers of broadband access
  services, standards compliance, and general industry and economic conditions.
  Some of these factors are outside of our control. The existing conditions in
  the broadband access market could change rapidly and significantly as a result
  of technological changes, and the development and market acceptance of
  alternative technologies could decrease the demand for our products or render
  them obsolete. In addition, these companies and other competitors could
  introduce broadband access products that will be less costly or provide
  superior performance or achieve greater market acceptance than our products.
  
     Many of our current and potential competitors have significantly greater
  financial, technical, marketing, distribution, customer support and other
  resources, as well as greater name recognition and access to customers.
  
     The market for our products may be impacted by the development of other
  technologies that enable the provisioning of broadband access services and the
  deployment of services over other media. Widespread acceptance of other
  technologies or deployment of services over media not supported by our products
  could materially limit acceptance of our broadband access systems. Broadband
  access services supported by our products and technology may fail to gain
  widespread commercial acceptance by providers of broadband access services and
  end users.
  
  Intellectual Property
  
     We rely on a combination of patent, trade secret, copyright and trademark
  laws and contractual restrictions to establish and protect proprietary rights
  in our products. Our pending patent applications may not be granted. Even if
  they are granted, the claims covered by the patents may be reduced from those
  included in our applications. Any patent might be subject to challenge in court
  and, whether or not challenged, might not be broad enough to prevent third
  parties from developing equivalent technologies or products without taking a
  license from us. We have entered into confidentiality and invention assignment
  agreements with our employees, and we enter into non-disclosure agreements with
  some of our suppliers, distributors and appropriate customers so as to limit
  access to and disclosure of our proprietary information. These statutory and
  contractual arrangements may not prove sufficient to prevent misappropriation
  of our technology or to deter independent third-party development of similar
  technologies. In addition, the laws of some foreign countries might not protect
  our products or intellectual property rights to the same extent as do the laws
  of the United States. Protection of our intellectual property might not be
  available in every country in which our products might be manufactured,
  marketed or sold.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
  version of the DOSCIS cable modem specification based in part on our S-CDMA
  technology. In September 1999, CableLabs indicated that it intended to proceed
  with the advanced PHY work on two parallel tracks: one for the development of a
  prototype based on our S-CDMA technology and one for the inclusion of Advanced
  TDMA technology, as proposed by other companies. In February 2000, CableLabs
  further clarified the status of the advanced PHY project regarding a separate
  release that will include TDMA technologies. In addition, CableLabs reiterated
  that it is continuing to work with us on the development of a DOCSIS
  specification that could include our S-CDMA technology. To that end, we have
  indicated to CableLabs that we would contribute some aspects of our S-CDMA
  technology to the DOCSIS intellectual property pool if and when a DOCSIS
  specification is approved that includes our
  
                                         30
  
  <PAGE>
  
  S-CDMA technology. We would contribute our technology pursuant to a license
  agreement with CableLabs that we would execute at that time, and which contains
  the terms that CableLabs has established for the inclusion of any intellectual
  property from any source in the DOCSIS specifications. Under the terms of the
  proposed license agreement, we would grant to CableLabs a royalty-free license
  for those aspects of our S-CDMA technology that are essential for compliance
  with the DOCSIS cable modem standard. So-called "implementation know how" is
  not covered by this license-only those aspects of the technology that are
  essential to implementing a compliant product. CableLabs would have the right
  to extend royalty-free sublicenses to companies that wish to build DOCSIS-
  compatible products. These sublicenses would allow participating companies to
  utilize and incorporate the essential portions of the S-CDMA technology on a
  royalty-free basis for the limited use of making and selling products or
  systems that comply with the DOCSIS cable modem specification Terayon has
  already joined the DOCSIS intellectual property pool and, as a result, we have
  a royalty-free sublicense that allows us to ship DOCSIS-compatible products
  which contain intellectual property submitted by other companies. The scope of
  this license would not extend to the use of the S-CDMA technology in other
  areas; only for products that comply with the DOCSIS specifications. As a
  result, any of our competitors who join or have joined the DOCSIS intellectual
  property pool will have access to some aspects of our technology without being
  required to pay us any royalties or other compensation. If and when we submit
  S-CDMA to the DOCSIS Intellectual Property pool, we are in no way restricted
  from entering into royalty-bearing license agreements with companies that wish
  to use the S-CDMA technology for purposes other than implementing DOCSIS
  compatible products, or that do not wish to enter into the DOCSIS intellectual
  property pool. Further, some of our competitors have been successful in reverse
  engineering the technology of other companies, and the inclusion of S-CDMA in a
  future DOCSIS specification would expose some aspects of our technology to
  those competitors. DOCSIS specifications are available on an open basis once
  they are approved, not only to companies that are members of the DOCSIS IP
  Pool. If a competitor is able to duplicate the functionality and capabilities
  of our technology, we could lose all or some of the time-to-market advantage we
  might otherwise have. Under the terms of the proposed license agreement, if we
  sue certain parties to the proposed license agreement on claims of infringement
  of any copyright or patent right or misappropriation of any trade secret, those
  parties may terminate our license to the patents or copyrights they contributed
  to the DOCSIS intellectual property pool. If a termination like this were to
  occur, we would continue to have access to some aspects of the DOCSIS
  intellectual property pool, but we would not be able to develop products that
  fully comply with the DOCSIS cable modem specification. Also, even if we were
  to be removed from the IP pool, we would not be prevented from developing and
  selling products that fully comply with the DOCSIS specifications, but we would
  not be able to do this with the benefit of a royalty-free license, which would
  increase the cost of our products, assuming we were able to obtain a license
  agreement for the required technology. Because of these terms, we may find it
  difficult to enforce our intellectual property rights against certain
  companies, even in areas that are not directly related to DOCSIS specifications
  and products.
  
     We anticipate that developers of cable modems increasingly will be subject
  to infringement claims as the number of products and competitors in our
  industry segment grows. We have received letters from two individuals claiming
  that our technology infringes patents held by these individuals. We have
  reviewed the allegations made by these individuals and, after consulting with
  our patent counsel, we do not believe that our technology infringes any valid
  claim of these individuals' patents. If the issues are submitted to a court,
  the court could find that our products infringe these patents. In addition,
  these individuals may continue to assert infringement. If we are found to have
  infringed these individuals' patents, we could be subject to substantial
  damages and/or an injunction preventing us from conducting our
  
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  business. In addition, other third parties may assert infringement claims
  against us in the future. An infringement claim, whether meritorious or not,
  could be time-consuming, result in costly litigation, cause product shipment
  delays or require us to enter into royalty or licensing agreements. These
  royalty or licensing agreements may not be available on terms acceptable to us
  or at all. Litigation also may be necessary to enforce our intellectual
  property rights.
  
     We pursue the registration of our trademarks in the United States and have
  applications pending to register several of our trademarks. However, the laws
  of certain foreign countries might not protect our products or intellectual
  property rights to the same extent as the laws of the United States. This means
  that effective trademark, copyright, trade secret and patent protection might
  not be available in every country in which our products might be manufactured,
  marketed or sold.
  
  Employees
  
     As of May 31, 2000, we had 690 employees, of which 351 were in the research
  and development group, 147 were in marketing, sales and customer support,
  114 were in operations and 78 were in general and administrative functions.
  None of our employees is represented by a union. We believe that our relations
  with our employees are good.
  
  Properties
  
     Our headquarters are located in an approximately 60,000 square foot leased
  facility located in Santa Clara, California. The current lease for the Santa
  Clara facility expires in March 2002. We have sales offices in Atlanta,
  Georgia; Sao Paulo, Brazil; and Brussels, Belgium. In addition, we lease
  approximately 82,000 square feet in Tel Aviv pursuant to an agreement that
  expires in 2005. It is our intention to consolidate the operations of our
  Israeli operations in this space. We believe that our existing facilities are
  adequate to meet our needs for the immediate future and that our future growth
  can be accommodated by leasing additional or alternative space near our current
  facilities.
  
  Legal Proceedings
  
     In September 1999, Imedia, now our subsidiary, was named as a defendant in a
  case alleging that Imedia breached its term sheet agreement with the plaintiffs
  by negotiating with us while a no-shop provision was in place and refusing to
  allowing the plaintiffs to invest in Imedia. The plaintiffs are seeking damages
  in excess of $12.0 million. As part of the terms of the Imedia Agreement and
  Plan of Merger and Reorganization, shares of our common stock to be issued to
  the former shareholders of Imedia were placed in escrow to indemnify us for any
  damages that are directly or indirectly suffered as a result any claim brought
  by any person who was a prospective investor in Imedia and was not a
  securityholder of Imedia on the closing date of the Imedia acquisition. The
  value of the escrowed shares was approximately $10.0 million based on the
  market value of our common stock on the closing date. The case is in its
  initial stages, and no trial date has been established. We have reviewed the
  allegations made by the plaintiffs and we do not believe that the outcome will
  have a negative impact on our financial position, results of operations or cash
  flows.
  
     In April 2000, a lawsuit against us and certain of our officers and
  directors, entitled Birnbaum v. Terayon Communication Systems, Inc., was filed
  in the United States District Court for the Central District of California. The
  venue for the lawsuit has been moved to the Northern District of California.
  The plaintiff purports to be suing on behalf of a class of stockholders who
  purchased or obligated themselves to purchase our securities during the period
  from February 2, 2000 to April 11, 2000. The complaint alleges that the
  defendants
  
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  violated the federal securities laws by issuing materially false and misleading
  statements and failing to disclose material information regarding our
  technology. Several other lawsuits similar to the Birnbaum suit have since been
  filed. The lawsuits seek an unspecified amount of damages, in addition to other
  forms of relief. We consider the lawsuits to be without merit and we intend to
  defend vigorously against these allegations. However, the litigation could
  prove to be costly and time consuming to defend, and there can be no assurances
  about the eventual outcome.
  
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  <PAGE>
  
    The section entitled Management's Discussion and Analysis of Financial
  Condition and Results of Operations should be deleted and replaced with the
  following section:
  
                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  Overview
  
     We develop, market and sell broadband access systems. Our objective is to be
  the leading provider of broadband access systems to providers of services to
  residential and commercial end users. Since our inception in January 1993, we
  have focused on the development of our patented S-CDMA technology, as well as
  certain other core technologies, to enable broadband transmission of data over
  cable networks. We began the specification and design of our first ASIC in
  October 1994 and produced the first version of this ASIC in September 1996. At
  the same time, we developed an end-to-end broadband access system, the TeraComm
  system, around the ASIC. We commenced volume shipments of our TeraComm system
  in the first quarter of 1998. With some recent acquisitions of complementary
  technology and businesses, in 1999 we also began to turn our attention to
  providers of broadband services using existing telephone, copper wire
  infrastructures and wireless systems.
  
     We sell our products both in North America and internationally, and we
  market our products primarily to cable operators and distributors. Our strategy
  is to supply the leading providers of broadband access services worldwide.
  Consistent with this strategy, our initial target market consisted of the ten
  largest cable companies in each major geographic area. In most markets, a small
  number of large cable operators often provide services to a majority of the
  subscribers in a specific region and thus influence the purchase decisions of
  smaller cable operators. In North America, three of the largest cable
  operators, Rogers Cable Inc. (formerly Rogers Cablesystems Limited), Shaw and
  TCA Cable TV (a subsidiary of Cox Communications, Inc.), are deploying the
  TeraComm system. In Japan, through our partner Sumitomo, we have established
  ourselves as a market leader. In Europe, our TeraComm system is being deployed
  by UPC, one of Europe's largest broadband communications companies. As a result
  of the nature of the cable industry and our strategic focus, a small number of
  customers have accounted for the majority of our revenues to date, and we
  expect that the majority of our revenues will continue to be generated from a
  small number of customers for the foreseeable future. In the three months ended
  March 31, 2000, four customers accounted for approximately 64% of our revenues.
  This compares to approximately 63% of our revenues from three customers in the
  same period in 1999. We anticipate that the timing and maturity of these
  customers' deployments of the TeraComm system will result in variations in
  revenues generated from these customers.
  
     The rapid evolution of broadband has resulted in cable television operators,
  providers of telephone service and other service providers seeking to provide a
  bundle of voice, data and video services to their residential and commercial
  subscribers over existing and new infrastructures. Consistent with our
  objective to be a leading provider of broadband access systems, through a
  series of recent acquisitions, we are building a complete portfolio of
  broadband products to support high-speed delivery of voice, data and video
  services over cable, DSL and wireless. In September 1999, we acquired Imedia
  and the CherryPicker digital video management system. In November 1999, we
  completed our acquisition of Radwiz, a provider of communication access systems
  based on high-speed IP routing integrated with telephony. On January 2, 2000,
  we completed our acquisition of Telegate, a developer and manufacturer of
  telephony and data access platforms that are deployed by service providers to
  deliver efficient carrier-class voice services over cable. In addition, we
  acquired Combox, a manufacturer of broadband data systems and satellite
  communications based on international standards, and certain assets of Internet
  Telecom, a supplier of PacketCable and other standards-based, voice-over IP
  systems and technologies, through our Israeli subsidiary, Telegate. On April
  19, 2000, we acquired Ultracom, a supplier of broadband systems on silicon.
  Finally, on April 22, 2000, we acquired ANE, a producer of DSL systems that
  provide multiple phone lines over existing copper telephony of a single pair of
  copper wires.
  
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  <PAGE>
  
     The intensely competitive nature of the market for broadband access systems
  has resulted in significant price erosion over time. We have experienced and
  expect to continue to experience downward pressure on our unit ASP or average
  selling price. A key component of our strategy is to decrease the cost of
  manufacturing our products to improve our gross margins. For example, in the
  fourth quarter of 1998, we introduced a cable modem using a single-board
  design, which has higher gross margins than our original dual-board design.
  Subsequently, we have successfully introduced several cost reduced versions of
  the single-board modem that have allowed us to continue to improve gross margin
  performance despite ongoing ASP declines. We intend to continue to engage in
  and implement cost reduction efforts, including the further integration of ASIC
  components, other design changes and manufacturing efficiencies.
  
     We sustained a net loss of $28.4 million for the three months ended March
  31, 2000 and $5.9 million in the same period in 1999. We had an accumulated
  deficit of $176.8 million as of March 31, 2000. Our operating expenses are
  based in part on our expectations of future sales, and we expect that a
  significant portion of our expenses will be committed in advance of sales. We
  expect to continue to increase our expenditures in technical development and
  sales and marketing as we engage in activities related to product enhancement,
  cost reduction and increasing market penetration. In addition, we anticipate
  that our expenses will increase as a result of the expenses associated with our
  recent acquisitions, including amortization. We also anticipate that future
  acquisitions will result in increased expense levels. Additionally, we expect
  to increase our capital expenditures and other operating expenses in order to
  support and expand our operations. We anticipate that we will spend
  approximately $17.0 million on capital expenditures and approximately $40.0 to
  $50.0 million on research and development during the 12 months ending March 31,
  2001. Anticipated capital expenditures consist of purchases of additional test
  equipment to support higher levels of production and computer hardware,
  furniture and leasehold improvements for expansion of our facilities,
  implementation of an enterprise resource planning ("ERP") system and software
  and equipment for newly hired employees. As a result of these anticipated
  increased operating expenses, we expect to continue to incur losses for the
  foreseeable future.
  
  Acquisition of Telegate
  
     In October 1999, we entered into a Share Purchase Agreement to acquire
  Telegate, an Israeli company. Telegate produces telephony and data access
  platforms that are deployed by service providers to deliver efficient carrier-
  class voice services over cable. Telegate also provides in-home networking
  capability for telephony and data, based on the Digital Enhanced Cordless
  Telephony (DECT) standard. The transaction was completed on January 2, 2000.
  The acquisition was accounted for under the purchase method of accounting and,
  accordingly, our Report on Form 10-Q dated May 15, 2000 presents our financial
  results through the entire period and combined results with Telegate for the
  portion of the period following January 2, 2000.
  
  Recent Events
  
     Subsequent to March 31, 2000, we completed our acquisitions of ANE, Combox,
  Internet Telecom and Ultracom. The Unaudited Pro Forma Combined Condensed
  Financial Statements included elsewhere in this document reflect the impact of
  the ANE and Combox acquisitions. The Unaudited Pro Forma Combined Condensed
  Financial Statements do not include the
  
                                         35
  
  <PAGE>
  
  impact of the Internet Telecom and Ultracom acquisitions. The purchase price
  for Internet Telecom and Ultracom is estimated at approximately $94 million. We
  believe that a significant portion of the purchase price will be allocated to
  intangible assets, including goodwill. The intangible assets will be amortized
  over lives expected to range from two to five years.
  
     In April 2000, we acquired certain assets and assumed certain liabilities of
  ANE, which produces DSL systems that provide multiple phone lines over the
  existing copper telephony network. We issued 1,404,552 shares of common stock,
  valued at approximately $85.0 million based on the maximum purchase price
  specified in the asset purchase agreement. We also established an employee
  retention program for purposes of retaining certain identified employees of
  ANE. The retention program provides for up to three annual payments to the
  identified employees in a total amount of approximately $4.2 million provided
  the employees remain employed by us. The retention payments will be charged to
  expense over the employees' respective periods of service. We will account for
  the acquisition as a purchase transaction.
  
     In April 2000, we also acquired Combox, an Israeli manufacturer of broadband
  data systems and satellite communications based on international standards.
  Combox's cable data access systems conform to the growing EuroModem
  international specification, based on the Digital Video Broadcasting (DVB)
  standard. We issued 1,547,770 shares of common stock valued at approximately
  $92.0 million based on the fair market value of our common stock on the days
  immediately preceding and following the date the acquisition was announced. In
  addition, we issued options to purchase our common stock to the vested and
  unvested optionholders of Combox options. We will account for the acquisition
  as a purchase transaction.
  
     In April 2000, our subsidiary Telegate purchased certain assets of Internet
  Telecom, an Israeli-based supplier of PacketCable and other standards-based,
  voice-over-IP systems and technologies. We issued 377,380 shares of common
  stock valued at approximately $44.0 million based on the fair market value of
  our common stock on the days immediately preceding and following the
  announcement of the acquisition and paid the former shareholders of Internet
  Telecom approximately $1.5 million. We will account for the transaction as a
  purchase transaction.
  
     In April 2000, we acquired Ultracom, an Israeli-based supplier of broadband
  systems-on-silicon. We issued 536,766 shares of common stock valued at
  approximately $50.0 million based on the fair market value of the our common
  stock on the days immediately preceding and following the date the acquisition
  was announced. We assumed the unvested Ultracom options, the value of which
  will be included in the purchase price. We will account for the transaction as
  a purchase transaction.
  
  Results of Operations
  
   Three Months Ended March 31, 2000 and 1999
  
     Revenues.  Revenues consist primarily of sales of broadband access systems
  consisting of cable modems and headend equipment to new and existing customers.
  Our revenues increased to $59.3 million for the three months ended March 31,
  2000 from $15.9 million for the same period in 1999. The increased revenues in
  the first three months of 2000, as compared to the same quarter in 1999, were
  largely attributable to continuing deployment of our TeraComm system by
  existing customers. The sales of products acquired as a result of our
  acquisition of Imedia, Radwiz and Telegate accounted for approximately $8.8
  million of the increased revenue in the first quarter of 2000.
  
  
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  <PAGE>
  
     We sell our products directly to broadband access service providers, system
  resellers and distributors. Revenues related to product sales are generally
  recognized when the products are shipped to the customer, the point at which
  title passes. A provision is made for estimated product returns as product
  shipments are made. Our existing agreements with our system resellers and
  distributors do not contain price protection provisions and do not grant return
  rights beyond those provided by our standard warranty.
  
     Cost of Goods Sold. Cost of goods sold consists of direct product costs as
  well as the cost of our manufacturing operations group. The cost of the
  manufacturing operations group includes assembly, test and quality assurance
  for products, warranty costs and associated costs of personnel and equipment.
  For the three months ended March 31, 2000, we incurred cost of goods sold of
  $43.9 million compared to $14.0 million for same period in 1999. Cost of goods
  sold for the three months ended March 31, 2000 included the cost of our
  manufacturing operations group and approximately $6.3 million of amortization
  of intangibles assets resulting from the acquisitions of Imedia, Radwiz and
  Telegate. Our cost of goods sold increased during the three months ended March
  31, 2000, compared to the same period in 1999 primarily due to increased
  product shipments.
  
     Gross Profit. We achieved a gross profit of $15.4 million for the three
  months ended March 31, 2000 compared to $1.9 million for the same period in
  1999. This improvement in our gross profit was largely the result of continued
  cost reduction efforts. We intend to continue to engage in and implement cost
  reduction efforts, including the further integration of ASIC components, other
  design changes and manufacturing efficiencies. We anticipate that continued
  decreases in the average sales price of our products will partially, if not
  completely, offset the benefits obtained from further cost reductions.
  
     Our gross profit also is influenced by the sales mix of TeraLink Master
  Controllers, TeraLink Gateways and TeraPro cable modems and the maturity of
  TeraComm system deployments in any quarter. TeraPro cable modems have lower
  margins than the TeraLink Master Controllers and TeraLink Gateway headend
  products. New deployments of TeraComm systems typically include a higher mix of
  headend equipment and involve smaller quantities of product sold. Products sold
  in connection with new deployments thus generally are sold at higher margins
  than products associated with more mature deployments of the TeraComm system,
  which generally involve larger quantities of products, primarily cable modems.
  We expect that the introduction of new customers and the relationship of
  revenues generated from the sale of TeraPro cable modems to our overall
  revenues will result in fluctuations in our gross profit in future periods.
  
     We introduced a CableLabs certified DOSCIS 1.0 cable modem in third quarter
  of 1999. We also are currently developing a DOCSIS system that will include a
  headend controller. We believe that the widespread adoption of industry
  standards will result in further price pressure. We anticipate that the
  relationship of revenues generated from the sale of our proprietary TeraComm
  system versus a DOCSIS compliant system will result in fluctuations in our
  gross profit in future periods. The impact on our gross profit for the three
  months ended March 31, 2000 resulting from the sale of our DOCSIS 1.0 cable
  modem was not significant.
  
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  <PAGE>
  
     Our gross profit also is influenced by the level of sales of products of
  acquired companies, which produce varying gross profit results. We expect that
  our gross profit will fluctuate in future periods as a result of these and
  other acquisitions.
  
     Research and Development. Research and development expenses consist
  primarily of personnel costs, as well as design expenditures, equipment and
  supplies required to develop and to enhance our products. Research and
  development expenses increased to $10.6 million for the three months ended
  March 31, 2000 from $3.2 million in the same period of 1999, primarily as a
  result of increased personnel costs. The increased personnel costs were a
  result of expansion in our own employee base as we continued to focus our
  efforts on developing new products and enhancing our current products. The
  increased personnel costs were also the result of the acquisitions of Imedia,
  Radwiz and Telegate. We intend to continue to increase investment in research
  and development as a result of these and other activities.
  
     Cost of Product Development Assistance Agreement. In March 1999, we entered
  into a one-year Product Development Assistance Agreement with Rogers. Under the
  terms of the Development Agreement, Rogers is obligated to assist us with the
  characterization and testing of our subscriber-end and head-end voice-over-
  cable equipment. In addition, Rogers is obligated to provide us with technology
  to assist us with our efforts to develop high quality, field proven technology
  solutions that are DOCSIS-compliant and PacketCable-compliant. The Development
  Agreement has a term of one year. In consideration of Rogers entering into the
  Development Agreement, we issued Rogers two fully vested and non-forfeitable
  warrants, each to purchase two million shares of common stock on a cashless
  basis. One warrant had an exercise price of $0.50 per share and one warrant had
  an exercise price of $18.50 per share. The fair value of the two warrants was
  approximately $45.0 million and resulted in a noncash charge included in
  operations over the one-year term of the Development Agreement. As a result of
  the Development Agreement, our results for the three months ended March 31,
  2000 include a noncash charge of $9.6 million compared to $1.6 million for the
  same period in 1999. In March 2000, Rogers purchased 3,687,618 shares of our
  common stock on a net exercise basis, resulting in no proceeds to us.
  
     Sales and Marketing. Sales and marketing expenses consist primarily of
  salaries and commissions for sales, marketing and support personnel, and costs
  related to trade shows, consulting and travel. Sales and marketing expenses
  increased to $7.7 million for the three months ended March 31, 2000 from $2.8
  million for the same period in 1999. The increase in sales and marketing
  expenses was primarily due to increased payroll costs related to additional
  sales and support personnel necessary to support the expansion of our customer
  base. In addition, the increase in sales and marketing expenses was
  attributable to the increased payroll and associated costs resulting from the
  acquisitions of Imedia, Radwiz and Telegate, and increased commissions related
  to higher sales. We expect sales and marketing expenses to continue to increase
  as we expand our customer base.
  
     General and Administrative. General and administrative expenses primarily
  consist of salary and benefits for administrative officers and support
  personnel, travel expenses, legal, accounting and consulting fees. General and
  administrative expenses increased to $4.2 million for the three months ended
  March 31, 2000 from $1.2 million in the same period of 1999. The increase was
  primarily due to costs associated with the increased infrastructure required to
  support our expanded activities and increased personnel costs associated with
  our acquisitions of Imedia, Radwiz and Telegate. We expect general and
  administrative expenses will continue to increase in the near term as a result
  of these factors.
  
     In-Process Research and Development. We incurred charges of $6.8 million for
  the three months ended March 31, 2000 related to research and development
  projects in process at
  
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  Telegate at the time of the acquisition. The projects identified as in-process
  will require additional effort in order to establish technological feasibility.
  These projects have identifiable technological risk factors that indicate that
  even though successful completion is expected, it is not assured.
  
     In-process technology acquired consists primarily of major additions to
  Telegate's core technology, which is related to Telegate's planned development
  of new features. The majority of the intended functionality of these new
  features is not supported by Telegate's current technology. Intended new
  features include: connection on demand functionality to extend the product's
  ISDN compatibility; the ability to use cordless technology for either voice or
  data applications; and, a subscriber end unit that can be used in multi-
  dwelling units. Notwithstanding our expectations, there remain significant
  technical challenges that must be resolved in order to complete the in-process
  technology.
  
     Goodwill Amortization. The Imedia acquisition was completed on September 16,
  1999 and was accounted for as a purchase transaction. The total purchase price,
  representing the fair value of our shares issued and transaction and direct
  acquisition costs, was approximately $109.0 million. The purchase price was
  allocated between the net tangible assets of Imedia on the date of acquisition
  (approximately $645,000), in-process research and development (approximately
  $11.0 million) and intangible assets acquired (approximately $97.3 million).
  Intangible assets consist of developed technology (approximately $27.0
  million), assembled workforce (approximately $2.5 million), trademark
  (approximately $4.0 million) and goodwill (approximately $63.8 million). The
  intangible assets will be amortized straight line over lives ranging from two
  to six years. The amortization of developed technology will impact cost of
  goods sold in future periods. The amortization of the other intangibles will
  principally impact operating expenses in future periods.
  
     The Radwiz acquisition was completed on November 22, 1999 and was accounted
  for as a purchase transaction. The total purchase price, representing the fair
  value of our shares issued and transaction and direct acquisition costs, was
  approximately $53.6 million. The purchase price was allocated between the net
  tangible assets of Radwiz on the date of acquisition (approximately $3.1
  million), in-process research and development (approximately $3.6 million) and
  net intangible assets acquired (approximately $46.9 million). Intangible assets
  consist of developed technology (approximately $29.9 million), assembled
  workforce (approximately $2.8 million), trademark (approximately $1.1 million)
  and goodwill (approximately $24.1 million). Goodwill has been increased and
  deferred tax liabilities have been recorded in the amount of approximately
  $11.0 million to reflect the net tax effect of the book/tax basis differences
  in the acquired intangibles, excluding goodwill and in-process research and
  development. The intangible assets will be amortized straight line over lives
  ranging from two to six years. The amortization of developed technology will
  impact cost of goods sold in future periods. The amortization of the other
  intangibles will principally impact operating expenses in future periods.
  
     The Telegate acquisition was completed on January 2, 1999 and was accounted
  for as a purchase transaction. The total purchase price, representing the fair
  value of our shares issued and transaction and direct acquisition costs, was
  approximately $140.0 million. The purchase price was allocated between the net
  tangible assets of Telegate on the date of acquisition (approximately $6.9
  million), in-process research and development (approximately $6.8 million) and
  intangible assets acquired (approximately $126.3 million). Intangible assets
  consist of developed technology (approximately $21.1 million), customer
  relationship
  
                                         39
  
  <PAGE>
  
  (approximately $34.6 million) assembled workforce (approximately $4.2 million),
  and goodwill (approximately $66.6 million). Goodwill has been increased and
  deferred tax liabilities have been recorded in the amount of approximately
  $167,000 to reflect the net tax effect of the book/tax basis differences in the
  acquired intangibles, excluding goodwill and in-process research and
  development. Deferred tax assets have been realized based on the projected
  reversal of taxable temporary differences and have been netted against deferred
  tax liabilities for purposes of allocating the purchase price. The intangible
  assets will be amortized straight line over lives expected to range from two to
  six years. The amortization of developed technology and customer relationship
  will impact cost of goods sold in future periods. The amortization of the other
  intangibles will principally impact operating expenses in future periods.
  
     We expect amortization of goodwill and other intangibles related to
  acquisitions subsequent to March 31, 2000, to increase in future periods.
  
     Net Interest Income (Expense). Net interest income was $1.4 million for the
  three months ended March 31, 2000 compared to $1.0 million for the same period
  in 1999.
  
     Income Taxes. We have generated operating losses since our inception. Due to
  our inability to recognize a benefit from these operating losses we have no
  provision for income taxes in 1999 and 1998. We account for income taxes under
  Statement of Financial Accounting Standards No. 109, Accounting for Income
  Taxes ("FAS 109"). Under FAS No. 109, deferred tax assets and liabilities are
  determined based on the difference between financial reporting and tax bases of
  assets and liabilities, and are measured using the enacted tax rates and laws
  that will be in effect when the differences are expected to reverse. FAS 109
  provides for the recognition of deferred tax assets if realization of such
  assets is more likely than not. Based upon the weight of available evidence,
  which includes our historical operating performance and the reported cumulative
  net losses for the prior three years, we have provided a full valuation against
  our net deferred tax assets as of March 31, 2000 and 1999.
  
  Results of Operations
  
   Years Ended December 31, 1999 and 1998
  
     Revenues. Our revenues increased to $97.0 million in 1999 from $31.7 million
  in 1998. Revenues consist primarily of sales of cable modems and headend
  equipment to new and existing customers. The increased revenues in 1999 were
  primarily attributable to the addition of new customers in 1999 and continuing
  deployments of our TeraComm system by existing customers, and, to a lesser
  extent, the sales of products acquired as a result of our acquisition of
  Imedia. The impact on revenues resulting from the acquisition of Radwiz was not
  significant for the year ended December 31, 1999.
  
     We sell our products directly to broadband access service providers, system
  resellers and distributors. Revenues related to product sales are generally
  recognized when the products are shipped to the customer. A provision is made
  for estimated product returns as product shipments are made. Our existing
  agreements with our system resellers and distributors do not contain price
  protection provisions and do not grant return rights beyond those provided by
  the Company's standard warranty.
  
     Cost of Goods Sold. Cost of goods sold consists of direct product costs as
  well as the cost of our manufacturing operations group. The cost of the
  manufacturing operations group includes assembly, test and quality assurance
  for products, warranty costs and associated costs of personnel and equipment.
  In 1999, we incurred $72.0 million in cost of goods sold,
  
                                         40
  
  <PAGE>
  
  which included the cost of our manufacturing operations group and approximately
  $1.9 million of amortization of intangibles assets resulting from the
  acquisitions of Imedia and Radwiz. In 1998, we incurred $34.5 million in cost
  of goods sold, which included the cost our manufacturing operations group and a
  charge of $1.3 million relating to the write-off of obsolete inventory and the
  transition of manufacturing operations.
  
     Gross Profit (Loss). Our gross profit was $25.0 million or 26% of revenue in
  1999. This compares to a gross loss of $2.8 million in 1998. The improvement in
  our gross profit in 1999 compared to 1998 was due largely to the introduction
  of a cable modem using a single-board design in the fourth quarter of 1998.
  This modem has a higher gross margin than our original dual board design.
  Subsequent to the introduction of the single-board design, we have successfully
  introduced cost reduced versions that have allowed us to continue to improve
  gross margin. We intend to continue to engage in and implement cost reduction
  efforts, including the further integration of ASIC components, other design
  changes and manufacturing efficiencies. We anticipate that continued decreases
  in the average sales price of our products will partially, if not completely,
  offset the benefits obtained from further cost reductions.
  
     Our gross profit also is influenced by the sales mix of TeraLink Master
  Controllers, TeraLink Gateways and TeraPro cable modems and the maturity of
  TeraComm system deployments in any quarter.  TeraPro cable modems have lower
  margins than the TeraLink Master Controllers and TeraLink Gateway headend
  products. New deployments of TeraComm systems typically include a higher mix of
  headend equipment and involve smaller quantities of product sold. Products sold
  in connection with new deployments thus generally are sold at higher margins
  than products associated with more mature deployments of the TeraComm system,
  which generally involve larger quantities of products, primarily cable modems.
  We expect that the introduction of new customers and the relationship of
  revenues generated from the sale of TeraPro cable modems to our overall revenue
  will result in fluctuations in our gross profit in future periods.
  
     We introduced a CableLabs certified DOSCIS 1.0 cable modem to the market in
  third quarter of 1999. We also are currently developing a DOCSIS system that
  will include a headend controller. We believe that the widespread adoption of
  industry standards will result in further price pressure. We anticipate that
  the relationship of revenues generated from the sale of our proprietary
  TeraComm system versus a DOCSIS compliant system will result in fluctuations in
  our gross profit in future periods. The impact on our gross margin in 1999
  resulting from the sale of our DOCSIS 1.0 cable modem was not significant.
  
     Our gross margin also is influenced by the level of sales of products of
  acquired companies, which produce varying gross margin results. We expect that
  our gross margin will fluctuate in future periods as a result of these and
  other acquisitions.
  
     Research and Development. Research and development expenses consist
  primarily of personnel costs, as well as design expenditures, equipment and
  supplies required to develop and to enhance our products. Research and
  development expenses increased to $17.6 million in 1999 from $10.7 million in
  1998, primarily as a result of increased personnel costs. The increased
  personnel costs are a result of expansion in our own employee base as we
  continue to focus our efforts on developing new products and enhancing our
  current products. The increased personnel costs are also the result of the
  acquisitions of Imedia and Radwiz. We intend to continue to increase investment
  in research and development as a result of these and other activities.
  
                                         41
  
  <PAGE>
  
     Cost of Product Development Assistance Agreement. In March 1999, we entered
  into a one-year Product Development Assistance Agreement with Rogers. Under the
  terms of the Development Agreement, Rogers is obligated to assist us with the
  characterization and testing of our subscriber-end and head-end voice-over-
  cable equipment. In addition, Rogers is obligated to provide us with technology
  to assist us with our efforts to develop high quality, field proven technology
  solutions that are DOCSIS-compliant and PacketCable-compliant. The Development
  Agreement has a term of one year. In consideration of Rogers entering into the
  Development Agreement, we issued Rogers two fully vested and non-forfeitable
  warrants, each to purchase 2.0 million shares of common stock on a cashless
  basis. One warrant has an exercise price of $0.50 per share and one warrant had
  an exercise price of $18.50 per share. The warrants may be exercised at any
  time in full or in part through March 31, 2000. The fair value of the two
  warrants was approximately $45.0 million and resulted in a noncash charge
  included in operations over the one-year term of the Development Agreement. As
  a result of the Development Agreement, our results for 1999 include a noncash
  charge of $35.1 million. In March 2000, Rogers purchased 3,687,618 shares of
  our common stock on a net exercise basis, resulting in no proceeds to us.
  
     In-Process Research and Development. We incurred charges of $11.0 million
  for the year ended December 31, 1999 related to research and development
  projects in process at Imedia at the time of the acquisition and $3.6 million
  related to research and development project in process at Radwiz at the time of
  the acquisition. The projects identified as in-process will require additional
  effort in order to establish technological feasibility. These projects have
  identifiable technological risk factors that indicate that even though
  successful completion is expected, it is not assured.
  
     In-process technology resulting from the acquisition of Imedia consists
  primarily of major additions to Imedia's core technology, which is related to
  Imedia's planned development of new features. The majority of the intended
  functionality of these new features is not supported by Imedia's current
  technology. Intended new features include offering high quality video service
  over the Internet and multiplexing data with video. We expect that in-process
  technology will be successfully developed and that initial benefits from these
  projects will begin in 2001. However, there remain significant technical
  challenges that must be resolved in order to complete the in-process
  technology.
  
     In-process technology resulting from the acquisition of Radwiz consists
  primarily of major additions to Radwiz's core technology, which is related to
  Radwiz's planned development of new features. The majority of the intended
  functionality of these new features is not supported by Radwiz's current
  technology. Intended new features include offering: end-to-end carrier quality
  of service; allowing access via an ATM network; and, providing ISDN line
  functionality. We expect that in-process technology will be successfully
  developed and that initial benefits from these projects will begin in mid-year
  2000. However, significant technical challenges must be resolved in order to
  complete the in-process technology.
  
     Sales and Marketing. Sales and marketing expenses consist primarily of
  salaries and commissions for sales, marketing and support personnel, and costs
  related to trade shows, consulting and travel. Sales and marketing expenses
  increased to $15.7 million in 1999 from $6.9 million in 1998, primarily due to
  increased payroll costs related to additional sales and support personnel
  necessary to support the expansion of our customer base and resulting from the
  acquisitions of Imedia and Radwiz, and increased commissions related to higher
  sales. We expect sales and marketing expenses to continue to increase as we
  expand our customer base.
  
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  <PAGE>
  
     General and Administrative. General and administrative expenses primarily
  consist of salary and benefits for administrative officers and support
  personnel, travel expenses, legal, accounting and consulting fees. General and
  administrative expenses increased to $7.5 million in 1999 from $3.2 million in
  1998. The increase was primarily a result of costs associated with the
  increased infrastructure required to support our expanded activities and due to
  increased personnel costs associated with our acquisitions of Imedia and
  Radwiz. We expect that general and administrative expenses will continue to
  increase in the near term as a result of these factors.
  
     Amortization of Goodwill and Other Intangible Assets. The Imedia acquisition
  was completed on September 16, 1999 and was accounted for as a purchase
  transaction. The total purchase price, representing the fair value of our
  shares issued and transaction and direct acquisition costs, was approximately
  $109.0 million. The purchase price was allocated between the net tangible
  assets of Imedia on the date of acquisition (approximately $645,000), in-
  process research and development (approximately $11.0 million) and intangible
  assets acquired (approximately $97.3 million). Intangible assets consist of
  developed technology (approximately $27.0 million), assembled workforce
  (approximately $2.5 million), trademark (approximately $4.0 million) and
  goodwill (approximately $63.8 million). The intangible assets will be amortized
  straight line over lives ranging from two to six years. The amortization of
  developed technology will impact cost of goods sold in future periods. The
  amortization of the other intangibles will principally impact operating
  expenses in future periods.
  
     The Radwiz acquisition was completed on November 22, 1999 and was accounted
  for as a purchase transaction. The total purchase price, representing the fair
  value of our shares issued and transaction and direct acquisition costs, was
  approximately $53.6 million. The purchase price was allocated (based on an
  independent appraisal) between the net tangible assets of Imedia on the date of
  acquisition (approximately $3.1 million), in-process research and development
  (approximately $3.6 million) and net intangible assets acquired (approximately
  $46.9 million). Intangible assets consist of developed technology
  (approximately $29.9 million), assembled workforce (approximately $2.8
  million), trademark (approximately $1.1 million) and goodwill (approximately
  $24.1 million). Goodwill has been increased and deferred tax liabilities have
  been recorded in the amount of approximately $11.0 million to reflect the net
  tax effect of the book/tax basis differences in the acquired intangibles,
  excluding goodwill and in-process research and development. Deferred tax assets
  have been realized based on the projected reversal of taxable temporary
  differences and have been netted against deferred tax liabilities for purposes
  of allocating the purchase price. The intangible assets will be amortized
  straight line over lives ranging from two to six years. The amortization of
  developed technology will impact cost of goods sold in future periods. The
  amortization of the other intangibles will principally impact operating
  expenses in future periods.
  
     We expect amortization of goodwill and other intangibles related to the
  acquisitions of Imedia and Radwiz, as well as subsequent acquisitions, to
  increase in future periods.
  
     Net Interest Income. Net interest income increased to $5.0 million in 1999
  from $449,000 in 1998, primarily as a result of higher average cash balances
  subsequent to our public offering in January 1999.
  
     Series F Convertible Preferred Stock Dividend. We recorded a dividend of
  $23.9 million in 1998. The dividend represented the fair value of a warrant to
  purchase 6,000,000 shares of our common stock (the "Shaw Warrant"), and was
  recorded under the provision of EITF No. 96-13, "Accounting for Derivative
  Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
  Stock." The warrant was issued in connection with the sale of $5.0 million of
  convertible preferred stock to Shaw. Shaw purchased 3,000,000 shares of common
  stock in
  
                                         43
  
  <PAGE>
  
  March 1999 and 3,000,000 shares of our common stock in November 1999 under the
  terms of the Shaw Warrant resulting in net proceeds to us of $19.5 million.
  
     Income Taxes. We have generated operating losses since our inception. Due to
  our inability to recognize a benefit from these operating losses we have no
  provision for income taxes in 1999 and 1998, We account for income taxes under
  FAS 109. Under FAS 109, deferred tax assets and liabilities are determined
  based on the difference between financial reporting and tax bases of assets and
  liabilities, and are measured using the enacted tax rates and laws that will be
  in effect when the differences are expected to reverse. FAS 109 provides for
  the recognition of deferred tax assets if realization of such assets is more
  likely than not. Based upon the weight of available evidence, which includes
  the Company's historical operating performance and the reported cumulative net
  losses for the prior three years, the Company has provided a full valuation
  against its net deferred tax assets as of December 31, 1999 and 1998. We intend
  to evaluate our ability to realize the benefit of the deferred tax assets on a
  quarterly basis. See Note 12 to the Consolidated Financial Statements for the
  year ended December 31,1999.
  
     Stock-Based Compensation. As of December 31, 1999, we had recorded deferred
  compensation of $2.6 million related to certain stock options granted in 1998
  and 1997. We amortized approximately $631,000 of the deferred compensation in
  1999, $421,000 in 1998 and $12,000 in 1997. The remainder will be amortized
  over the related vesting period of the stock options. See Note 11 of Notes to
  Consolidated Financial Statements for the year ended December 31, 1999.
  
   Years Ended December 31, 1998 and 1997
  
     Revenues. Our revenues increased to $31.7 million in 1998 from $2.1 million
  in 1997. Revenues consist primarily of sales of cable modems and headend
  equipment to new and existing customers. We did not commence selling our
  products until June 1997 and did not commence selling our products in volume
  until the first quarter of 1998.
  
     Cost of Goods Sold. In 1998, we incurred $34.5 million in cost of goods
  sold, which included the costs our manufacturing operations group and a charge
  of $1.3 million relating to the write-off of obsolete inventory and the
  transition of manufacturing operations. In 1997, we incurred $6.5 million in
  cost of goods sold, which included the cost of the manufacturing group for the
  entire period as we readied our products for commercialization.
  
     Gross Loss. We incurred a gross loss of $2.8 million in 1998. In 1997, we
  incurred a gross loss of $4.3 million due to costs associated with our
  manufacturing operations group. The decrease in gross loss in 1998 compared to
  1997 was primarily due to a reduced negative margin on cable modems, which was
  partially offset by the $1.3 million write-off relating to obsolete inventory
  and the transition of manufacturing operations to Solectron. We completed the
  transition to a lower cost, single-board modem product in the fourth quarter of
  1998. Primarily as a result of this lower cost product, we achieved a positive
  gross margin of $425,000 in the fourth quarter of 1998.
  
     Research and Development. Research and development expenses decreased to
  $10.7 million in 1998 from $11.3 million in 1997 as a result of the timing of
  our development projects.
  
     Sales and Marketing. Sales and marketing expenses increased to $6.9 million
  in 1998 from $4.5 million in 1997, primarily due to increased payroll costs
  related to additional sales
  
                                         44
  
  <PAGE>
  
  and support personnel for commercial trials and deployment of our products and
  increased commissions related to higher sales in 1998.
  
     General and Administrative. General and administrative expenses increased to
  $3.2 million in 1998 from $2.5 million in 1997, primarily a result of the
  additional reporting requirements imposed on us as a public company and
  increased infrastructure to support our expanded activities.
  
     Net Interest Income. Net interest income increased to $449,000 in 1998 from
  $128,000 in 1997, primarily as a result of higher average cash balances
  subsequent to our initial public offering in August 1998.
  
     Series F Convertible Preferred Stock Dividend. We recorded a dividend of
  $23.9 million in 1998. The dividend represents the fair value the Shaw Warrant.
  The Shaw Warrant was issued in connection with the sale of $5.0 million of
  convertible preferred stock to Shaw (the "Shaw Financing"). Our accounting
  conclusion was that the sale of preferred stock was, in substance, a financing
  transaction and not the issuance of equity instruments in exchange for goods or
  services.
  
     Income Taxes. We have not generated operating losses since inception. Due to
  our inability to recognize a benefit from these operating losses we have no
  provision for income taxes in 1998 and 1997. We account for income taxes under
  Statement of Financial Accounting Standards No. 109. Realization of deferred
  tax assets is dependent on future earnings, if any, the timing and amount of
  which are uncertain. Accordingly, valuation allowances in amounts equal to the
  net deferred tax assets as of December 31, 1998 and 1997 have been established
  to reflect these uncertainties.
  
     Stock-Based Compensation. As of December 31, 1998, we had recorded deferred
  compensation of $2.6 million related to certain stock options granted in 1998
  and 1997. We amortized approximately $421,000 of the deferred compensation in
  1998 and $12,000 in 1997. The remainder will be amortized over the related
  vesting period of the stock options. See Note 10 of Notes to Consolidated
  Financial Statements for the year ended December 31, 1999.
  
   Liquidity and Capital Resources
  
     At March 31, 2000, we had approximately $54.7 million in cash and cash
  equivalents, $63.2 million in short-term investments and a $2.5 million
  revolving line of credit. There were no outstanding borrowings under the line
  of credit and approximately $2.5 million was available.
  
     Cash provided by operating activities in the first three months of 2000 was
  $5.8 million. This compares to cash used in operating activities of $3.7
  million in the first three months of 1999. Cash provided by investing
  activities was $13.2 million in the first three months of 2000 compared to cash
  used in investing activities of $55.5 million in the first three months of
  1999. Investment activities consisted primarily of the purchase and sale of
  short-term investments in 2000 and 1999. Cash provided by financing activities
  was $3.2 million for the three months ended March 31, 2000 compared to $85.6
  million for the three months ended March 31, 1999. Financing activities
  consisted primarily of proceeds from the exercise of options and the issuance
  of common stock in 2000 and from the sale and issuance of common stock in a
  public offering in 1999.
  
     As of March 31, 2000, we had approximately $125.7 million of unconditional
  purchase obligations. We anticipate that we will pay approximately $69.1
  million of these obligations by June 30, 2000. We intend to make these payments
  out of available working capital.
  
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  <PAGE>
  
     We believe that our current cash and cash equivalent balances, together with
  cash anticipated to be generated from operations and anticipated financing
  arrangements, including this offering, will satisfy our projected working
  capital and capital expenditure requirements, at a minimum, for the next twelve
  months.
  
   Impact of Year 2000
  
     In prior years, we discussed the nature and progress of our plans to become
  year 2000 ready. In late 1999, we completed the remediation and testing of our
  systems. As a result of those planning and implementation efforts, we
  experienced no significant disruptions in mission critical information
  technology and non-information technology systems and we believe those systems
  successfully responded to the year 2000 date change. We incurred no significant
  costs in 1999 in connection with the remediation of our systems. We are not
  aware of any material problems resulting from year 2000 issues, either with our
  products, our internal systems, or the products and services of third parties.
  We will continue to monitor our mission critical computer applications and
  those of our suppliers and vendors throughout the rest of the year to ensure
  that any latent year 2000 matters that may arise are addressed promptly.
  
   Recent Financial Accounting Pronouncement
  
     In September 1998, the Financial Accounting Standards Board issued Statement
  of Financial Accounting Standards No. 133, "Accounting for Derivative
  Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a
  comprehensive and consistent standard for the recognition and measurement of
  derivatives and hedging activities. FAS 133 was effective for fiscal years
  beginning after September 15, 1999. In July 1999, the Financial Accounting
  Standards Board issued Statement of Financial Accounting Standards No. 137,
  "Accounting for Derivative Instruments and Hedging Activities--Deferral of the
  Effective Date of FASB Statement No. 133" (FAS 137). FAS 137 defers for one
  year the effective date of FAS 133 which will now apply to all fiscal quarters
  of all fiscal years beginning after June 15, 2000. We believe that the adoption
  of FAS 133 will not have a significant impact on our operating results or cash
  flows.
  
     In December 1999, the Securities and Exchange Commission issued Staff
  Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
  ("SAB 101"). SAB 101 provides guidance on the recognition, presentation and
  disclosure of revenue in the financial statements of public companies. The
  accounting profession is currently exploring practical means of implementing
  the guidelines established by SAB 101. To the extent that SAB 101 is applicable
  to us, we will be required to change our revenue recognition policy. In June
  2000 the Securities and Exchange Commission issued SAB 101 B which delays the
  effective date of SAB 101 until no later than the fourth fiscal quarter
  beginning after December 15, 1999. We will be required to adopt SAB 101 by the
  fourth quarter of 2000. Financial information for prior quarters would be
  restated with the cumulative effect adjustment reflected in the first quarter
  of 2000 in accordance with FASB Statement No. 3, Reporting Accounting Changes
  in Interim Financial Statements. In subsequent periods, we would disclose the
  amount of revenue, if material, recognized in those periods that were included
  in the cumulative effect adjustment. We currently cannot determine what effect,
  if any, that SAB 101 will have on our financial statements. We believe that SAB
  101, to the extent it is applicable to us, will not effect the underlying
  strength or weakness of our business operations as measured by the dollar value
  of our shipments and cash flows.
  
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  <PAGE>
  
    The section entitled Certain Business Risk should be deleted and replaced with
  the following section:
  
  
                              CERTAIN BUSINESS RISK
  
     Before making an investment decision, you should carefully consider the risks
  described below. The risks and uncertainties described below are not the only
  ones facing our company. Additional risks and uncertainties not presently known
  to us or that we currently deem immaterial also may impair our business
  operations. If any of the following risks actually occur, our business could be
  harmed. In such case, the trading price of our common stock could decline, and
  you may lose all or part of your investment.
  
                           Risks Related to Our Business
  
  We have a limited operating history and a history of losses.
  
     We have a limited operating history, and it is difficult to predict our
  future operating results. We began shipping products commercially in June 1997,
  and we only have been shipping products in volume since the first quarter of
  1998. As of March 31, 2000, we had an accumulated deficit of $176.8 million. We
  believe that we will continue to experience net losses for the foreseeable
  future. Most of our expenses are fixed in advance, and we generally are unable
  to reduce our expenses significantly in the short term to compensate for any
  unexpected delay or decrease in anticipated revenues. We expect to continue to
  increase expenses for the foreseeable future to support increased sales and
  marketing and technical support costs. Any significant delay in our anticipated
  revenues or commercialization of new products would harm our business. The
  revenue and profit potential of our business and our industry are unproven. We
  had negative gross margins from our inception until the fourth quarter of 1998,
  and any future revenue growth may not result in positive gross margins or
  operating profits in future periods.
  
  Our operating results may fluctuate.
  
     Our quarterly revenues are likely to fluctuate significantly in the future
  due to a number of factors, many of which are outside our control. Factors that
  could affect our revenues include the following:
  
    .  variations in the timing of orders and shipments of our products;
  
    .  variations in the size of the orders by our customers;
  
    .  new product introductions by competitors;
  
    .  delays in our introduction of new products;
  
    .  delays in our receipt of orders forecasted by our customers;
  
    .  delays by our customers in the completion of upgrades to their cable
       infrastructure;
  
    .  variations in capital spending budgets of broadband access service
       providers;
  
    .  adoption of industry standards and the inclusion in or compatibility of
       our technology with any such standards; and
  
    .  delays in obtaining regulatory approval for commercial deployment of
       cable modem systems.
  
     Our expenses generally will vary from quarter to quarter depending on the
  level of actual and anticipated business activities. Research and development
  expenses will vary as we begin development of new products and as our
  development programs move to wafer fabrication and prototype development, which
  results in higher engineering expenses.
  
                                         47
  <PAGE>
  
     A variety of factors affect our gross margin, including the following:
  
    .  the sales mix of our products;
  
    .  the volume of products manufactured;
  
    .  the type of distribution channel through which we sell our products;
  
    .  the average selling prices or "ASPs" of our products; and
  
    .  the effectiveness of our cost reduction measures.
  
     We anticipate that unit ASPs of our products will decline in the future.
  This could cause a decrease in the gross margins for these products. In
  addition, the maturity of TeraComm system deployments affects our gross margin.
  New deployments of the TeraComm system involve the sale of headend equipment
  (which has higher margins) and generally involve smaller quantities of product.
  New deployments typically are sold at higher margins than the larger volume
  sales of product associated with more mature deployments of the TeraComm
  system. The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways
  and TeraPro cable modems also affects our gross margin. The TeraPro cable
  modems have significantly lower margins than the TeraLink 1000 Master
  Controller and TeraLink Gateway headend products. We expect to achieve
  significantly lower margins on the TeraPro cable modems for the foreseeable
  future. Further, we expect that sales of TeraPro cable modems will continue to
  constitute a significant portion of our revenues for the foreseeable future.
  
     We also anticipate that our operating results will be impacted by sales,
  gross profit and operating expenses of acquired companies. The impact of these
  factors on our operating results will vary as we acquire additional companies.
  
  We are dependent on a small number of customers.
  
     Four customers accounted for approximately 64% of our revenues for the
  quarter ended March 31, 2000 and three customers accounted for approximately
  63% of our revenues for the quarter ended March 31, 1999. We believe that a
  substantial majority of our revenues will continue to be derived from sales to
  a relatively small number of customers for the foreseeable future. In addition,
  we believe that sales to these customers will be focused on a limited number of
  projects.
  
     The cable industry is undergoing significant consolidation in North America
  and internationally, and a limited number of cable operators controls an
  increasing number of cable systems. Currently, ten cable operators in the
  United States own and operate facilities passing approximately 86% of total
  homes passed. In addition, the North American DSL market is concentrated with
  the major ILECs, constituting a significant percentage of the market. As a
  result, our sales will be largely dependent upon product acceptance by the
  leading broadband service providers. Currently, the timing and size of each
  customer's order is critical to our operating results. Our major customers are
  likely to have significant negotiating leverage and may attempt to change the
  terms, including pricing, upon which we do business with them. These customers
  also may require longer payment terms than we anticipate, which could require
  us to raise additional capital to meet our working capital requirements.
  
  Acquisitions could result in dilution, operating difficulties and other adverse
  consequences.
  
     We have acquired seven businesses since September 1999: Imedia Corporation
  in September 1999; Radwiz in November 1999; Telegate in January 2000; ANE in
  April 2000; ComBox in April 2000; some assets of Internet Telecom in April
  2000; and Ultracom in April
  
                                         48
  
  <PAGE>
  
  2000. If appropriate opportunities present themselves, we intend to acquire
  additional businesses, technologies, services or products that we believe are
  strategic. The process of integrating any acquired business into our business
  and operations is risky and may create unforeseen operating difficulties and
  expenditures. The areas in which we may face difficulties include:
  
    .  diversion of management time (both ours and that of the acquired
       companies) during the period of negotiation through closing and after
       closing from the ongoing development of our businesses, issues of
       integration and future products;
  
    .  decline in employee morale and retention issues resulting from changes
       in compensation, reporting relationships, future prospects or the
       direction of the business;
  
     We typically sell products to our customers pursuant to purchase orders, and
  we therefore generally do not have long-term agreements in place with our
  customers.
  
    .  the need to integrate each company's accounting, management information,
       human resource and other administrative systems to permit effective
       management, and the lack of control if this integration is delayed or
       not implemented; and
  
    .  the need to implement controls, procedures and policies appropriate for
       a larger public group of companies that prior to acquisition had been
       smaller, private companies.
  
     We have very limited experience in managing this integration process.
  Moreover, the anticipated benefits of any or all of these completed or pending
  acquisitions may not be realized. Future acquisitions could result in
  potentially dilutive issuances of equity securities, the incurrence of
  additional debt, contingent liabilities or amortization expenses related to
  goodwill and other intangible assets, any of which could harm our business.
  Future acquisitions also could require us to obtain additional equity or debt
  financing, which may not be available on favorable terms or at all. Even if
  available, this financing may be dilutive.
  
  The sales cycle for our products is lengthy.
  
     The sales cycle associated with our products typically is lengthy, often
  lasting six months to a year. Our customers typically conduct significant
  technical evaluations of competing technologies prior to the commitment of
  capital and other resources. In addition, purchasing decisions may be delayed
  because of our customers' internal budget approval procedures. Sales also
  generally are subject to customer trials, which typically last three months.
  Because of the lengthy sales cycle and the large size of customers' orders, if
  orders forecasted for a specific customer for a particular quarter do not occur
  in that quarter, our operating results for that quarter could suffer.
  
  There are many risks associated with our participation in the establishment of
  advanced physical layer specifications to be added to DOCSIS.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2 (Data Over
  Cable Service Interface Specifications), an enhanced version of the DOCSIS
  cable modem specification based in part on our S-CDMA technology. In September
  1999, CableLabs indicated that it intended to proceed with the advanced
  physical layer ("PHY") work on two parallel tracks: one for the development of
  a prototype based on our S-CDMA technology and
  
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  one for the inclusion of Advanced TDMA technology (Time Division Multiple
  Access), as proposed by other companies. In February 2000, CableLabs further
  clarified the status of the advanced PHY project regarding a separate release
  that will include TDMA technologies. In addition, CableLabs reiterated that it
  is continuing to work with us on the development of a DOCSIS specification that
  could include our S-CDMA technology. To that end, CableLabs has requested that
  we submit a prototype of a DOCSIS system that incorporates an S-CDMA advanced
  PHY capability for testing. CableLabs has stated that if the testing of this
  prototype reveals that the S-CDMA advanced PHY works as claimed (including
  proper backwards compatibility and coexistence with the other aspects of
  DOCSIS), and if the costs for adding S-CDMA to DOCSIS products are in line with
  estimates, then it is likely, but not certain, that S-CDMA advanced PHY
  capabilities will be included in a future version of the DOCSIS specification.
  The prototype we submit to CableLabs may fail to demonstrate the level of
  performance that CableLabs seeks; even if it does meet performance expectations
  there can be no guarantee that CableLabs will incorporate the technology into a
  future version of DOCSIS specifications. In addition, if CableLabs does proceed
  to include S-CDMA in a future DOCSIS specification, there can be no guarantee
  that the DOCSIS S-CDMA specification will be the same as the specification we
  incorporated in the prototype submitted for tests, which may require us to
  further develop our prototype.
  
     Our future revenues and operating results are likely to suffer if S-CDMA is
  not included in a future release of DOCSIS. We also may incur substantial
  additional research and development expenditures to adapt our specifications to
  the version adopted by CableLabs. CableLabs has not established a schedule for
  adding the S-CDMA capabilities to the DOCSIS specifications. Delays in the
  establishment of a final specification for S-CDMA in DOCSIS could harm our
  plans to sell DOCSIS compatible modems and headend equipment. In particular, if
  the final DOCSIS S-CDMA specification is not approved prior to the time when we
  are ready to ship DOCSIS products with S-CDMA features included, then we may be
  required to delay the introduction of those products until the DOCSIS S-CDMA
  specification is released or to introduce the S-CDMA features as proprietary
  enhancements to a standard DOCSIS product. Either one of these events could
  harm revenues and operating results.
  
     We have already given CableLabs assurances that we will contribute some
  aspects of our proprietary S-CDMA technology to a royalty-free intellectual
  property pool, if S-CDMA is included in a future version of DOCSIS
  specifications. This royalty-free pool has been established by CableLabs to
  facilitate the participation of as many vendors as possible in providing
  equipment that is compatible with the DOCSIS specifications. As a result, any
  of our competitors who join the DOCSIS intellectual property pool would have
  access to some aspects of our technology and would not be required to pay us
  any royalties or other compensation. If a competitor is able to duplicate the
  functionality and capabilities of our technology, we could lose some or all of
  the time-to-market advantage we might otherwise have, which could harm our
  future revenues and operating results.
  
     We believe the addition of advanced upstream PHY capabilities to DOCSIS will
  increase the overall market for DOCSIS-compatible products, and as such will
  result in increased competition in the cable modem market. This competition
  could come from existing competitors or from new competitors who enter the
  market as a result of the enhancements to the specifications. This increased
  competition is likely to result in lower ASPs of cable modem systems and could
  harm revenues and gross margins. Because our competitors will be able to
  incorporate some aspects of our technology into their products, our current
  customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
  cable modems with advanced PHY capabilities from multiple suppliers. We may be
  unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
  more quickly or at lower cost than
  
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  our competitors. The inclusion of our S-CDMA technology in future DOCSIS
  specification could result in increased competition for the services of our
  existing employees who have experience with S-CDMA. The loss of these employees
  to one or more competitors could harm our business.
  
     DOCSIS standards have not yet been accepted in Europe and Asia. An alternate
  standard for cable modem systems, called the EuroModem standard, or DAVIC/DVB,
  has been formalized, and some European cable system operators have embraced it.
  We intend to develop and sell products that comply with the EuroModem standard
  and to pursue having portions of our S-CDMA technology included in a future
  version of the EuroModem standard. We may be unsuccessful in these efforts.
  
  We need to develop new products in order to remain competitive.
  
     Our future success will depend in part on our ability to develop, introduce
  and market new products in a timely manner. We also must respond to competitive
  pressures, evolving industry standards and technological advances. Our current
  S-CDMA products are not DOCSIS-compliant. We are currently developing a
  prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY
  capability for testing and eventual inclusion in the DOCSIS standard. There is
  no guarantee that we will be successful in developing the prototype or that the
  prototype, if successfully developed, will be included in a future release of
  the DOCSIS standard. We anticipate that during 2000, existing or potential
  customers may delay purchases of our TeraComm system in order to purchase
  systems that comply with the DOCSIS standard. In addition, potential new
  customers could decide to purchase DOCSIS-compliant products from one or more
  of our competitors rather than from us. As a result, our product sales in the
  second half of 2000 may be lower than we anticipate. In order to promote sales
  of our currents products we may be required to reduce our prices for sales to
  existing customers. This would harm our operating results and gross margin.
  
     As a result of the inclusion of TDMA technology in the new DOCSIS version
  announced by CableLabs in February 2000, we will have to incorporate advanced
  TDMA technology into our DOCSIS-compliant products. If we are unable to do this
  effectively, or in a timely manner, we will lose some or all of the time-to-
  market advantage we might otherwise have had.
  
     Our future success will also depend on our ability to develop and market
  products for broadband applications over DSL and wireless networks. The markets
  for these broadband applications are also subject to evolving standards, such
  as NEBS compliance in the North American DSL market, and technological advances
  in these arenas. There is no guarantee that we will be successful in developing
  products that are compliant with these standards or that we will be successful
  in keeping pace with future technological advances in this arena.
  
  Average selling prices of broadband access equipment typically decrease.
  
     The broadband access systems market has been characterized by erosion of
  average selling prices. We expect this to continue. This erosion is due to a
  number of factors, including competition, rapid technological change and price
  performance enhancements. The ASPs for our products may be lower than expected
  as a result of competitive pricing pressures, our promotional programs and
  customers who negotiate price reductions in exchange for longer term purchase
  commitments. We anticipate that ASPs and gross margins for our products will
  decrease over product life cycles. In addition, we believe that the widespread
  adoption of industry standards is likely to further erode ASPs, particularly
  for cable modems and other similar consumer premise equipment. It is likely
  that the widespread adoption of industry standards will result in increased
  retail distribution of cable modems and other similar
  
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  consumer premise equipment, which could put further price pressure on our
  products. Decreasing ASPs could result in decreased revenue even if the number
  of units sold increases. As a result, we may experience substantial period-to-
  period fluctuations in future operating results due to ASP erosion. Therefore,
  we must continue to develop and introduce on a timely basis next-generation
  products with enhanced functionalities that can be sold at higher gross
  margins. Our failure to do this could cause our revenues and gross margin to
  decline.
  
  We must achieve cost reductions.
  
     Certain of our competitors currently offer products at prices lower than
  ours. Market acceptance of our products will depend in part on reductions in
  the unit cost of our products. We expect that as headend equipment becomes more
  widely deployed, the price of cable modems and other similar consumer premise
  equipment will decline. In particular, we believe that the widespread adoption
  of industry standards such as DOCSIS will cause increased price competition for
  consumer premise equipment. However, we may be unable to reduce the cost of our
  products sufficiently to enable us to compete with other suppliers. Our cost
  reduction efforts may not allow us to keep pace with competitive pricing
  pressures or lead to gross margin improvement.
  
     Some of our competitors are larger and manufacture products in significantly
  greater quantities than we intend to for the foreseeable future. Consequently,
  these competitors have more leverage in obtaining favorable pricing from
  suppliers and manufacturers. In order to remain competitive, we must
  significantly reduce the cost of manufacturing our cable modems through design
  and engineering changes. We may not be successful in redesigning our products.
  Even if we are successful, our redesign may be delayed or may contain
  significant errors and product defects. In addition, any redesign may not
  result in sufficient cost reductions to allow us to significantly reduce the
  list price of our products or improve our gross margin. Reductions in our
  manufacturing costs will require us to use more highly integrated components in
  future products and may require us to enter into high volume or long-term
  purchase or manufacturing agreements. Volume purchase or manufacturing
  agreements may not be available on acceptable terms. We could incur expenses
  without related revenues if we enter into a high volume or long-term purchase
  or manufacturing agreement and then decide that we cannot use the products or
  services offered by such agreement.
  
  We must keep pace with rapid technological change to remain competitive.
  
     The markets for our products are characterized by rapid technological
  change, evolving industry standards, changes in end-user requirements and
  frequent new product introductions and enhancements. Our future success will
  depend upon our ability to enhance our existing products and to develop and
  introduce new products that achieve market acceptance. Providers of broadband
  access services may adopt alternative technologies or they may deploy
  alternative services that are incompatible with our products.
  
     The demand for broadband access services has resulted in the development of
  several competing modulation technologies. For example, some of our cable
  products utilize a modulation technology known as S-CDMA, while several of our
  competitors utilize modulation technologies known as TDMA and Frequency
  Division Multiple Access or "FDMA." Our headend equipment and cable modem
  products currently are not interoperable with the headend equipment and modems
  of other suppliers of broadband access products. As a result, potential
  customers who wish to purchase broadband access products from multiple
  
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  suppliers may be reluctant to purchase our products. Although our technology
  may be incorporated into a future version of a DOCSIS specification or another
  industry standard, we cannot be certain that major cable operators will adopt
  these standards. Major cable operators may not adopt products or technologies
  based on our current proprietary S-CDMA technology or on any future industry
  standard S-CDMA technology. Further, major cable operators may adopt products
  or standards technologies based on competing modulation technologies. If
  competitors using other modulation technologies can incorporate functionality
  and capabilities currently found in S-CDMA, the value of our S-CDMA technology
  would be diminished.
  
  Broadband access services have not achieved widespread market acceptance, and
  many competing technologies exist.
  
     Our success will depend upon the widespread commercial acceptance of
  broadband access services by service providers and end users of broadband
  access services. The market for these services is not fully developed. We
  cannot accurately predict the future growth rate or the ultimate size of the
  market for broadband access services. Potential users of our products may have
  concerns regarding the security, reliability, cost, ease of installation and
  use and capability of broadband access services in general.
  
     The market for our products may be impacted by the development of other
  technologies that enable the provisioning of broadband access services and the
  deployment of services over other media. Widespread acceptance of other
  technologies or deployment of services over media not supported by our products
  could materially limit acceptance of our broadband access systems. Broadband
  access services based on our products and technology may fail to gain
  widespread commercial acceptance by providers of broadband access services and
  end users. In addition, we only recently began to offer products based on
  alternate technologies such as DSL. We may not be successful in marketing and
  selling these products.
  
  We need to develop additional distribution channels.
  
     We presently market our TeraComm system to cable operators and systems
  integrators. We believe that much of the North American cable modem market may
  shift to a retail distribution model. Accordingly, we may need to redirect our
  future marketing efforts to sell our cable modems directly to retail
  distributors and end users. This shift would require us to establish new
  distribution channels for our products. We may be unable to establish these
  additional distribution channels. If we do establish them, we may be unable to
  hire the additional personnel necessary to foster and enhance such distribution
  channels. In addition, if the cable modem market shifts to a retail
  distribution model, we may not successfully establish a retail distribution
  presence. To the extent that large consumer electronics companies enter the
  cable modem market, their well-established retail distribution capabilities
  would provide them with a significant competitive advantage.
  
  We may be unable to market effectively to broadband access service providers.
  
     Our growth and future success will be substantially dependent upon our
  ability to convince providers of broadband access services to adopt our
  technologies, purchase our products and effectively market our products to end
  users. Our potential customers are likely to prefer purchasing products from
  established manufacturing companies that can demonstrate the capability to
  supply large volumes of products on short notice. In addition, many of our
  potential customers may be reluctant to adopt technologies that have not gained
  acceptance among other providers of similar services. This reluctance could
  result in lengthy product testing and acceptance cycles for our products.
  Consequently, the impediments to our initial sales may be even greater than
  those to later sales.
  
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  <PAGE>
  
     No established distribution network in the cable modem industry exists that
  would provide us with easy access to smaller or geographically diverse cable
  operators. Therefore, our initial sales to larger, more established cable
  operators are critical to our business. Although we intend to establish
  strategic relationships with leading distributors worldwide, we may not succeed
  in establishing these relationships. Even if we do establish these
  relationships, the distributors may not succeed in marketing our products to
  cable operators. Some of our competitors have already established relationships
  with certain cable operators. These established relationships may further limit
  our ability to sell products to those cable operators. We do not have long,
  well-established relationships with those cable operators. If we were to sell
  our products to those cable operators, it would likely not be based on long-
  term contracts and those customers would be able to terminate their
  relationships with us at any time. In addition, one or more of our current
  customers could cancel its relationship with us at any time.
  
     We have recently begun marketing and selling our products to providers of
  DSL and wireless broadband services and thus we have very limited experience.
  We do not have long, well-established relationships with these providers, and
  we may not be successful in establishing these relationships.
  
  We are dependent on broadband service providers choosing to offer additional
  services to their customers.
  
     We depend on cable operators to purchase our cable modem systems and to
  provide our cable modems to end users. Cable operators have a limited amount of
  available bandwidth over which they can offer robust data services, and they
  may not choose to provide these data services to their customers. If cable
  operators choose to provide these services, we also will depend upon them to
  market these services to cable customers, to install our equipment and to
  provide support to end users. In addition, we will be highly dependent on cable
  operators to continue to maintain their cable infrastructure in a manner that
  allows us to provide consistently high performance and reliable services. Our
  success also will depend upon the acceptance of our products by other providers
  of services to the cable industry, such as Excite@Home's @Home Network and Road
  Runner, a joint venture between MediaOne Group, Inc. and Time Warner Cable.
  Sales of our DSL and wireless products are also dependent on service providers
  choosing to purchase our products and to provide additional services to their
  end users.
  
  Sales of our cable products are dependent on the cable industry upgrading to
  two-way cable infrastructure.
  
     Demand for our products will depend, to a significant degree, upon the
  magnitude and timing of capital spending by cable operators for implementation
  of access systems for data transmission over cable networks. This involves the
  enabling of two-way transmission over existing coaxial cable networks and the
  eventual upgrade to HFC in areas of higher penetration of data services. If
  cable operators fail to complete these upgrades of their cable infrastructures
  in a timely and satisfactory manner, the market for our products could be
  limited. In addition, few businesses in the United States currently have cable
  access. Cable operators may not choose to upgrade existing residential cable
  systems or to install new cable systems to serve business locations.
  
     The success and future growth of our business will be subject to economic
  and other factors affecting the cable television industry generally,
  particularly its ability to finance substantial capital expenditures. Capital
  spending levels in the cable industry in the United
  
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  States have fluctuated significantly in the past, and we believe that such
  fluctuations will occur in the future. The capital spending patterns of cable
  operators are dependent on a variety of factors, including the following:
  
    .  the availability of financing;
  
    .  cable operators' annual budget cycles, as well as the typical reduction
       in upgrade projects during the winter months;
  
    .  the status of federal, local and foreign government regulation and
       deregulation of the telecommunications industry;
  
    .  overall demand for cable services;
  
    .  competitive pressures (including the availability of alternative data
       transmission and access technologies);
  
    .  discretionary consumer spending patterns; and
  
    .  general economic conditions.
  
     In recent periods, the United States cable market has been characterized by
  the acquisition of smaller and independent cable operators by large cable
  operators. We cannot predict the effect, if any, that consolidation in the
  United States cable industry will have on overall capital spending patterns by
  cable operators. The effect on our business of further industry consolidation
  also is uncertain.
  
  Supply of our products may be limited by our ability to forecast demand
  accurately.
  
     The emerging nature of the broadband access services market makes it
  difficult for us to accurately forecast demand for our products. Our inability
  to accurately forecast the actual demand for our products could result in
  supply, manufacturing or testing capacity constraints. These constraints could
  result in delays in the delivery of our products or the loss of existing or
  potential customers, either of which could have a negative impact on our
  business, operating results or financial condition. In addition, we had
  unconditional purchase obligations of approximately $125.7 million as of March
  31, 2000, primarily to purchase minimum quantities of materials and components
  used to manufacture our products. We must fulfill these obligations even if
  demand for our products is lower than we anticipate.
  
  We are dependent on key third-party suppliers.
  
     We manufacture all of our products using components or subassemblies
  procured from third-party suppliers. Some of these components are available
  from a single source and others are available from limited sources. All of our
  sales are from products containing one or more components that are available
  only from single supply sources. In addition, some of the components are custom
  parts produced to our specifications. For example, we currently rely on Philips
  Semiconductors, Inc. to supply a custom ASIC that is used in our products.
  Other components, such as the radio frequency tuner and some surface acoustic
  wave filters, are procured from sole source suppliers. Any interruption in the
  operations of vendors of sole source parts could adversely affect our ability
  to meet our scheduled product deliveries to customers. We are dependent on
  semiconductor manufacturers and are affected by worldwide conditions in the
  semiconductor market. If we are unable to obtain a sufficient supply of
  components from our current sources, we could experience difficulties in
  obtaining alternative sources or in altering product designs to use alternative
  components. Resulting delays or reductions in product shipments could damage
  customer relationships. Further, a significant increase in the price of one or
  more of these components could harm our gross margin or operating results.
  
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  Shortages in supplies of components may impair our ability to meet customer
  demands.
  
     Due to increasing demand for electronic and communications equipment, the
  worldwide market for component parts is currently constrained. Delays in key
  component or product deliveries may occur due to shortages resulting from a
  limited number of suppliers, the financial or other difficulties of such
  suppliers or a limitation in component product availability. Due to these
  current market conditions, we face the risk of possible shortages of certain
  key components that could result in product performance shortfalls and reduced
  control over or delay in delivery schedules, manufacturing capability, quality
  and costs, all of which could impair our ability to produce enough product to
  meet our customer demand. In addition, in order to fulfill demand for our
  products, we may have to purchase these components on the spot market at a
  price that may be higher than we have experienced in the past.
  
     Although we work closely with our suppliers to avoid these types of
  shortages, there can be no assurance that we will not encounter these problems
  in the future. While our suppliers have performed effectively and been
  relatively flexible to date, we believe that we will be faced with the
  following challenges going forward:
  
    .  New markets in which we participate may grow quickly and consume
       component capacity; and
  
    .  As we continue to acquire companies and new technologies, we are
       dependent, at least initially, on unfamiliar supply chains or relatively
       small supply partners.
  
     Manufacturing capacity and component supply constraints could be significant
  issues for us. If we were unable to obtain adequate quantities of significant
  component materials on a timely basis, our business and our customer
  relationships would be adversely affected. If we are unable to satisfy our
  customers' demand, our customers could decide to purchase products from our
  competitors. Inability to meet demand, or a decision by one or more of our
  customers to purchase from our competitors, could harm our operating results.
  
  We may be unable to migrate to new semiconductor process technologies
  successfully or on a timely basis.
  
     Our future success will depend in part upon our ability to develop products
  that utilize new semiconductor process technologies. These technologies change
  rapidly and require us to spend significant amounts on research and
  development. We continuously evaluate the benefits of redesigning our
  integrated circuits using smaller geometry process technologies to improve
  performance and reduce costs. The transition of our products to integrated
  circuits with increasingly smaller geometries will be important to our
  competitive position. Other companies have experienced difficulty in migrating
  to new semiconductor processes and, consequently, have suffered reduced yields,
  delays in product deliveries and increased expense levels. Moreover, we depend
  on our relationship with our third-party manufacturers to migrate to smaller
  geometry processes successfully.
  
  Our ability to directly control product delivery schedules and product quality
  is dependent on third-party contract manufacturers.
  
     Most of our products are assembled and tested by contract manufacturers
  using testing equipment that we provide. As a result of our dependence on these
  contract manufacturers for assembly and testing of our products, we do not
  directly control product delivery schedules or product quality. Any product
  shortages or quality assurance problems could increase the costs of
  manufacture, assembly or testing of our products. In addition, as manufacturing
  volume increases, we will need to procure and assemble additional testing
  equipment and provide it
  
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  to our contract manufacturers. The production and assembly of testing equipment
  typically requires significant time. We could experience significant delays in
  the shipment of our products if we are unable to provide this testing equipment
  to our contract manufacturers in a timely manner.
  
  There are many risks associated with international operations.
  
     Sales to customers outside of the United States accounted for approximately
  84% of our revenues in 1999 and approximately 74% of our revenues in 1998. We
  expect sales to customers outside of the United States to continue to represent
  a significant percentage of our revenues for the foreseeable future.
  International sales are subject to a number of risks, including the following:
  
    .  changes in foreign government regulations and communications standards;
  
    .  export license requirements, tariffs and taxes;
  
    .  other trade barriers;
  
    .  difficulty in protecting intellectual property;
  
    .  difficulty in collecting accounts receivable;
  
    .  difficulty in managing foreign operations; and
  
    .  political and economic instability.
  
     If our customers are affected by currency devaluations or general economic
  crises, such as the recent economic crisis affecting many Asian and Latin
  American economies, their ability to purchase our products could be reduced
  significantly. Payment cycles for international customers typically are longer
  than those for customers in the United States. Foreign markets for our products
  may develop more slowly than currently anticipated. Foreign countries may
  decide not to construct cable infrastructure or may prohibit, terminate or
  delay the construction of new cable plants for a variety of reasons. These
  reasons include environmental issues, economic downturns, the availability of
  favorable pricing for other communications services or the availability and
  cost of related equipment. Any action like this by foreign countries would
  reduce the market for our products.
  
     We anticipate that our foreign sales generally will be invoiced in U.S.
  dollars, and we currently do not plan to engage in foreign currency hedging
  transactions. However, as we commence and expand our international operations,
  we may be paid in foreign currencies and exposure to losses in foreign currency
  transactions may increase. We may choose to limit our exposure by the purchase
  of forward foreign exchange contracts or through similar hedging strategies. No
  currency hedging strategy can fully protect against exchange-related losses. In
  addition, if the relative value of the U.S. dollar in comparison to the
  currency of our foreign customers should increase, the resulting effective
  price increase of our products to those foreign customers could result in
  decreased sales.
  
  We may be unable to provide adequate customer support.
  
     Our ability to achieve our planned sales growth and retain current and
  future customers will depend in part upon the quality of our customer support
  operations. Our customers generally require significant support and training
  with respect to our broadband access systems, particularly in the initial
  deployment and implementation stages. To date our sales have been concentrated
  in a small number of customers. We have limited experience with widespread
  deployment of our products to a diverse customer base. We may not have
  
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  adequate personnel to provide the levels of support that our customers may
  require during initial product deployment or on an ongoing basis. Our inability
  to provide sufficient support to our customers could delay or prevent the
  successful deployment of our products. In addition, our failure to provide
  adequate support could harm our reputation and relationship with our customers
  and could prevent us from gaining new customers.
  
  Our industry is highly competitive with many established competitors.
  
     The market for broadband access systems is extremely competitive and is
  characterized by rapid technological change. Our direct competitors in the
  cable access systems arena include Cisco Systems, Com21, General Instrument,
  Matsushita Electric Industrial (which markets products under the brand name
  "Panasonic"), Motorola, Nortel Networks, Vyyo, Thomson Consumer Electronics
  (which markets products under the brand name "RCA"), Samsung, Scientific-
  Atlanta, Sony, 3Com, Toshiba and Zenith Electronics. We also compete with
  companies that develop integrated circuits for broadband access products, such
  as Broadcom, Conexant and Texas Instruments. We also sell products that compete
  with existing data access and transmission systems utilizing the
  telecommunications networks, such as those of 3Com. Additionally, our
  controller and headend system products face intense competition from well-
  established companies such as Cisco, Nortel and 3Com. In addition, we compete
  with companies in the DSL arena such as ECI, Charles Industries, Pairgain,
  Copper Mountain, Accelerated Networks, Integral Access and VINA Technologies.
  As standards, such as DOCSIS, are developed for broadband access systems, other
  companies may enter the broadband access systems market. The principal
  competitive factors in our market include the following:
  
    .  product performance, features and reliability;
  
    .  price;
  
    .  size and stability of operations;
  
    .  breadth of product line;
  
    .  sales and distribution capability;
  
    .  technical support and service;
  
    .  relationships with providers of broadband access services; and
  
    .  compliance with industry standards.
  
     Some of these factors are outside of our control. The existing conditions in
  the broadband access market could change rapidly and significantly as a result
  of technological advancements. The development and market acceptance of
  alternative technologies could decrease the demand for our products or render
  them obsolete. Our competitors may introduce broadband access products that are
  less costly, provide superior performance or achieve greater market acceptance
  than our products.
  
     Many of our current and potential competitors have significantly greater
  financial, technical, marketing, distribution, customer support and other
  resources, as well as greater name recognition and access to customers than we
  do. The anticipated widespread adoption of DOCSIS and other industry standards
  is likely to cause increased worldwide price competition, particularly in the
  North American market. The adoption of DOCSIS and these other standards also
  could result in lower sales of our TeraComm system, including the higher margin
  headend products. Any increased price competition or reduction in sales of our
  headend products would result in downward pressure on our gross margin. We
  cannot accurately predict how the competitive pressures that we face will
  affect our business.
  
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  <PAGE>
  
  Our business is dependent on the Internet and the development of the Internet
  infrastructure.
  
     Our success will depend in large part on increased use of the Internet to
  increase the need for high speed broadband access networks. Critical issues
  concerning the commercial use of the Internet remain largely unresolved and are
  likely to affect the development of the market for our products. These issues
  include security, reliability, cost, ease of access and quality of service. Our
  success also will depend on the growth of the use of the Internet by
  businesses, particularly for applications that utilize multimedia content and
  thus require high bandwidth. The recent growth in the use of the Internet has
  caused frequent periods of performance degradation. This has required the
  upgrade of routers, telecommunications links and other components forming the
  infrastructure of the Internet by Internet service providers and other
  organizations with links to the Internet. Any perceived degradation in the
  performance of the Internet as a whole could undermine the benefits of our
  products. Potentially increased performance provided by our products and the
  products of others ultimately is limited by and reliant upon the speed and
  reliability of the Internet backbone itself. Consequently, the emergence and
  growth of the market for our products will depend on improvements being made to
  the entire Internet infrastructure to alleviate overloading and congestion.
  
  Our failure to manage growth could adversely affect us.
  
     The growth of our business has placed, and is expected to continue to place,
  a significant strain on our limited personnel, management and other resources.
  Our management, personnel, systems, procedures and controls may be inadequate
  to support our existing and future operations. To manage any future growth
  effectively, we will need to attract, train, motivate, manage and retain
  employees successfully, to integrate new employees into our overall operations
  and to continue to improve our operational, financial and management systems.
  
  We are dependent on key personnel.
  
     Due to the specialized nature of our business, we are highly dependent on
  the continued service of, and on the ability to attract and retain qualified
  engineering, sales, marketing and senior management personnel. The competition
  for personnel is intense. The loss of any of these individuals, particularly
  our Chairman, President and Chief Technical Officer, Shlomo Rakib, and our
  Chief Executive Officer, Zaki Rakib, would harm our business. In addition, if
  we are unable to hire additional qualified personnel as needed, we may be
  unable to adequately manage and complete our existing sales commitments and to
  bid for and execute additional sales. Further, we must train and manage our
  growing employee base, which is likely to require increased levels of
  responsibility for both existing and new management personnel. Our current
  management personnel and systems may be inadequate, and we may fail to
  assimilate new employees successfully.
  
     Highly skilled employees with the education and training that we require,
  especially employees with significant experience and expertise in both data
  networking and radio frequency design, are in high demand. We may not be able
  to continue to attract and retain the qualified personnel necessary for the
  development of our business. We do not have "key person" insurance coverage for
  the loss of any of our employees. Any officer or employee of our company can
  terminate his or her relationship with us at any time. Our employees generally
  are not bound by non-competition agreements with us.
  
  Our business is subject to the risks of product returns, product liability and
  product defects.
  
     Products as complex as ours frequently contain undetected errors or
  failures, especially when first introduced or when new versions are released.
  Despite testing, errors may occur.
  
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  <PAGE>
  
  The occurrence of errors could result in product returns and other losses to
  our company or our customers. This occurrence also could result in the loss of
  or delay in market acceptance of our products. Due to the recent introduction
  of our products, we have limited experience with the problems that could arise
  with this generation of products. However, the limitation of liability
  provision contained in our purchase agreements may not be effective as a result
  of federal, state or local laws or ordinances or unfavorable judicial decisions
  in the United States or other countries. We have not experienced any product
  liability claims to date, but the sale and support of our products entails the
  risk of such claims. In addition, any failure by our products to properly
  perform could result in claims against us by our customers. We maintain
  insurance to protect against certain claims associated with the use of our
  products, but our insurance coverage may not adequately cover any claim
  asserted against us. In addition, even claims that ultimately are unsuccessful
  could result in our expenditure of funds in litigation and management time and
  resources.
  
  We may be unable to adequately protect or enforce our intellectual property
  rights.
  
     We rely on a combination of patent, trade secret, copyright and trademark
  laws and contractual restrictions to establish and protect proprietary rights
  in our products. Our pending patent applications may not be granted. Even if
  they are granted, the claims covered by the patents may be reduced from those
  included in our applications. Any patent might be subject to challenge in court
  and, whether or not challenged, might not be broad enough to prevent third
  parties from developing equivalent technologies or products without taking a
  license from us. We have entered into confidentiality and invention assignment
  agreements with our employees, and we enter into non-disclosure agreements with
  some of our suppliers, distributors and appropriate customers so as to limit
  access to and disclosure of our proprietary information. These statutory and
  contractual arrangements may not prove sufficient to prevent misappropriation
  of our technology or to deter independent third-party development of similar
  technologies. In addition, the laws of some foreign countries might not protect
  our products or intellectual property rights to the same extent as do the laws
  of the United States. Protection of our intellectual property might not be
  available in every country in which our products might be manufactured,
  marketed or sold.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
  version of the DOCSIS cable modem specification based in part on our S-CDMA
  technology. In September 1999, CableLabs indicated that it intended to proceed
  with the advanced PHY work on two parallel tracks: one for the development of a
  prototype based on our S-CDMA technology and one for the inclusion of Advanced
  TDMA technology, as proposed by other companies. In February 2000, CableLabs
  further clarified the status of the advanced PHY project regarding a separate
  release that will include TDMA technologies. In addition, CableLabs reiterated
  that it is continuing to work with us on the development of a DOCSIS
  specification that could include our S-CDMA technology. To that end, we have
  indicated to CableLabs that we would contribute some aspects of our S-CDMA
  technology to the DOCSIS intellectual property pool if and when a DOCSIS
  specification is approved that includes our S-CDMA technology.
  
     We would contribute our technology pursuant to a license agreement with
  CableLabs that we would execute at that time, and which contains the terms that
  CableLabs has established for the inclusion of any intellectual property from
  any source in the DOCSIS specifications. Under the terms of the proposed
  license agreement, we would grant to CableLabs a royalty-free license for those
  aspects of our S-CDMA technology that are essential for compliance with the
  DOCSIS cable modem standard. So-called "implementation know how" is not covered
  by this license-only those aspects of the technology that are essential to
  implementing a
  
                                         60
  <PAGE>
  
  compliant product. CableLabs would have the right to extend royalty-free
  sublicenses to companies that wish to build DOCSIS-compatible products. These
  sublicenses would allow participating companies to utilize and incorporate the
  essential portions of the S-CDMA technology on a royalty-free basis for the
  limited use of making and selling products or systems that comply with the
  DOCSIS cable modem specification. Terayon has already joined the DOCSIS
  intellectual property pool and, as a result, we have a royalty-free sublicense
  that allows us to ship DOCSIS-compatible products which contain intellectual
  property submitted by other companies. The scope of this license would not
  extend to the use of the S-CDMA technology in other areas; only for products
  that comply with the DOCSIS specifications. As a result, any of our competitors
  who join or have joined the DOCSIS intellectual property pool will have access
  to some aspects of our technology without being required to pay us any
  royalties or other compensation. If and when we submit S-CDMA to the DOCSIS
  Intellectual Property pool, we are in no way restricted from entering into
  royalty-bearing license agreements with companies that wish to use the S-CDMA
  technology for purposes other than implementing DOCSIS compatible products, or
  that do not wish to enter into the DOCSIS intellectual property pool. Further,
  some of our competitors have been successful in reverse engineering the
  technology of other companies, and the inclusion of S-CDMA in a future DOCSIS
  specification would expose some aspects of our technology to those competitors.
  DOCSIS specifications are available on an open basis once they are approved,
  not only to companies that are members of the DOCSIS IP Pool. If a competitor
  is able to duplicate the functionality and capabilities of our technology, we
  could lose all or some of the time-to-market advantage we might otherwise have.
  Under the terms of the proposed license agreement, if we sue certain parties to
  the proposed license agreement on claims of infringement of any copyright or
  patent right or misappropriation of any trade secret, those parties may
  terminate our license to the patents or copyrights they contributed to the
  DOCSIS intellectual property pool. If a termination like this were to occur, we
  would continue to have access to some aspects of the DOCSIS intellectual
  property pool, but we would not be able to develop products that fully comply
  with the DOCSIS cable modem specification. Also, even if we were to be removed
  from the IP pool, we would not be prevented from developing and selling
  products that fully comply with the DOCSIS specifications, but we would not be
  able to do this with the benefit of a royalty-free license, which would
  increase the cost of our products, assuming we were able to obtain a license
  agreement for the required technology. Because of these terms, we may find it
  difficult to enforce our intellectual property rights against certain
  companies, even in areas that are not directly related to DOCSIS specifications
  and products.
  
     We anticipate that developers of cable modems increasingly will be subject
  to infringement claims as the number of products and competitors in our
  industry segment grows. We have received letters from two individuals claiming
  that our technology infringes patents held by these individuals. We have
  reviewed the allegations made by these individuals and, after consulting with
  our patent counsel, we do not believe that our technology infringes any valid
  claim of these individuals' patents. If the issues are submitted to a court,
  the court could find that our products infringe these patents. In addition,
  these individuals may continue to assert infringement. If we are found to have
  infringed these individuals' patents, we could be subject to substantial
  damages and/or an injunction preventing us from conducting our business. In
  addition, other third parties may assert infringement claims against us in the
  future. An infringement claim, whether meritorious or not, could be time-
  consuming, result in costly litigation, cause product shipment delays or
  require us to enter into royalty or licensing agreements. These royalty or
  licensing agreements may not be available on terms acceptable to us or at all.
  Litigation also may be necessary to enforce our intellectual property rights.
  
     We pursue the registration of our trademarks in the United States and have
  applications pending to register several of our trademarks. However, the laws
  of certain foreign countries
  
                                         61
  
  <PAGE>
  
  might not protect our products or intellectual property rights to the same
  extent as the laws of the United States. This means that effective trademark,
  copyright, trade secret and patent protection might not be available in every
  country in which our products might be manufactured, marketed or sold.
  
  Our business is subject to communications industry regulations.
  
     Our business and our customers are subject to varying degrees of federal,
  state and local regulation. The jurisdiction of the Federal Communications
  Commission extends to the communications industry, including our broadband
  access products. The FCC has promulgated regulations that, among other things,
  set installation and equipment standards for communications systems. Although
  FCC regulations and other governmental regulations have not materially
  restricted our operations to date, future regulations applicable to our
  business or our customers could be adopted by the FCC or other regulatory
  bodies. For example, FCC regulatory policies affecting the availability of
  cable services and other terms on which cable companies conduct their business
  may impede our penetration of certain markets. In addition, regulation of cable
  television rates may affect the speed at which cable operators upgrade their
  cable infrastructures to two-way HFC. In addition, the increasing demand for
  communications systems has exerted pressure on regulatory bodies worldwide to
  adopt new standards for such products and services. This process generally
  involves extensive investigation of and deliberation over competing
  technologies. The delays inherent in this governmental approval process have in
  the past, and may in the future, cause the cancellation, postponement or
  rescheduling of the installation of communications systems by our customers.
  
     If other countries begin to regulate the cable modem industry more heavily
  or introduce standards or specifications with which our products do not comply,
  we will be unable to offer products in those countries until our products
  comply with those standards or specifications. In addition, we may have to
  incur substantial costs to comply with those standards or specifications. For
  instance, should the DAVIC standards for ATM-based digital video be established
  internationally, we will need to conform our cable modems to compete. Further,
  many countries do not have regulations for installation of cable modem systems
  or for upgrading existing cable network systems to accommodate our products.
  Whether we currently operate in a country without these regulations or enter
  into the market in a country these regulations do not exist, new regulations
  could be proposed at any time. The imposition of regulations like this could
  place limitations on a country's cable operators' ability to upgrade to support
  our products. Cable operators in these countries may not be able to comply with
  these regulations, and compliance with these regulations may require a long,
  costly process. For example, we experienced delays in product shipments to a
  customer in Brazil due to delays in certain regulatory approvals in Brazil.
  Similar delays could occur in other countries in which we market or plan to
  market our products. In addition, our customers in certain parts of Asia, such
  as Japan, are required to obtain licenses prior to selling our products, and
  delays in obtaining required licenses could harm our ability to sell products
  to these customers.
  
  Our business is subject to other regulatory approvals and certifications.
  
     In the United States, in addition to complying with FCC regulations, our
  products are required to meet certain safety requirements. For example, we are
  required to have our products certified by Underwriters Laboratory in order to
  meet federal requirements relating to electrical appliances to be used inside
  the home. Outside the United States, our products are subject to the regulatory
  requirements of each country in which the products are manufactured or sold.
  These requirements are likely to vary widely. We may be unable to obtain on a
  timely basis or at all the regulatory approvals that may be required for the
  
                                         62
  
  <PAGE>
  
  manufacture, marketing and sale of our products. In addition to regulatory
  compliance, some cable industry participants may require certification of
  compatibility.
  
  We are vulnerable to earthquakes and other natural disasters.
  
     The facility housing our corporate headquarters, the majority of our
  research and development activities and our in-house manufacturing operations
  is located in an area of California known for seismic activity. In addition,
  the operations of some of our key suppliers are also located in this area and
  in other areas know for seismic activity, such as Taiwan. An earthquake, or
  other significant natural disaster, could result in an interruption in our
  business or that of one or more of our key suppliers. Such an interruption
  could harm our operating results.
  
  
                                         63
  
  <PAGE>
  
  
                                     Signature
  
    Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.
  
                                      Terayon Communication Systems, Inc.
  
  
  Dated:  July 18, 2000                By: /s/ Ray M. Fritz
                                           ----------------------------
                                           Ray M. Fritz
                                           Chief Financial Officer
  
  
                                        64
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text: SECURITIES EXCHANGE AND COMMISSION
                            Washington, D. C.  20549
  
                                    FORM 8-K
  
                                 CURRENT REPORT
  
                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
  
        Date of Report (Date of earliest event reported):  July 18, 2000
  
                       Terayon Communication Systems, Inc.
             (Exact name of registrant as specified in its charter)
  
                                    Delaware
                 (State or other jurisdiction of incorporation)
  
          000-24647                                        77-0328533
    (Commission File No.)                    (I.R.S. Employer Identification No.)
  
                              2952 Bunker Hill Lane
                              Santa Clara, CA 95054
              (Address of principal executive offices and zip code)
  
       Registrant's telephone number, including area code: (408) 727-4400
  Item 5.  Other Events
  
  Registration Statements Nos. 333-91823, 333-95357 and 333-37978
  
    Terayon Communication Systems, Inc. (the "Company") hereby amends Registration
  Statement Nos. 333-91823, 333-95357 and 333-37978 and any prospectuses and post-
  effective amendments filed thereon to revise the sections entitled Prospectus
  Summary and Risk Factors.
  
    The section entitled Prospectus Summary should be deleted and replaced with
  the following section:
  
                               PROSPECTUS SUMMARY
  
     As used in this offering memorandum, unless the context otherwise requires,
  "we," "us," "our," "Company" or "Terayon" refers to Terayon Communication
  Systems, Inc., the issuer of the Notes, and its subsidiaries. The following
  summary contains basic information about us and this offering. It likely does
  not contain all the information that is important to you. For a more complete
  understanding of this offering, we encourage you to read this entire offering
  memorandum and the documents to which we have referred you.
  
                                      Terayon
  
  Our Business
  
     We develop, market and sell broadband access systems that enable cable
  operators and other providers of broadband access services to cost effectively
  deploy reliable broadband access services over cable, copper wire utilizing
  digital subscriber line technology (or DSL) and wireless systems. We have
  substantial development and marketing resources focused on cable operators.
  However, through internal development and recent acquisitions of complementary
  technology and businesses, we also are focusing on service providers that offer
  broadband access through existing copper wire infrastructures and wireless
  systems.
  
     In recent years, the volume of bandwidth-intensive data, voice and video
  traffic across existing cable infrastructure, the Internet, corporate intranets
  and other public networks has increased dramatically. International Data
  Corporation estimates that the number of worldwide Internet users will increase
  from approximately 200 million at the end of 2000 to more than one billion by
  the end of 2005. IDC estimates that the number of homes in the United States
  with broadband access will increase from two million at the end of 1999 to 20
  million by the end of 2003. As a result of the rapid evolution of broadband
  access, cable operators, providers of telephone services and other service
  providers are providing a bundle of voice, data and video services to their
  residential and commercial subscribers over existing and new infrastructures.
  
     Our objective is to be the leading provider of broadband access systems to
  providers of broadband services that use existing cable, copper wire (DSL) and
  wireless networks to offer services to residential and commercial customers.
  Key elements of our strategy include the following:
  
    .  Build a complete portfolio of broadband products;
  
    .  Supply leading broadband service providers worldwide;
  
    .  Increase our presence in existing and new markets;
  
    .  Extend technology leadership and advance industry standards; and
  
    .  Provide superior customer support.
  
     Our primary product is the TeraComm system, which is based on our patented
  Synchronous Code Division Multiple Access or "S-CDMA" technology. Our S-CDMA
  technology enables reliable two-way broadband data communications over both
  pure coaxial and hybrid fiber/coax cable infrastructure and is designed to
  enable cable operators to maximize the capacity and reliability of broadband
  data services over any cable plant. In furtherance of our strategy to provide
  a complete portfolio of broadband products, we have
  
                                         2
  recently completed several acquisitions of complementary broadband
  technologies, including digital video management systems, DSL and wireless.
  
     We sell our broadband access products to cable operators and other providers
  of broadband access services through direct sales forces in North America,
  South America, Europe and Asia. We also distribute our products via
  distributors and systems integrators. Companies currently using or distributing
  our TeraComm system include Rogers Communications, Inc., Shaw Communications,
  Inc., TCA Cable TV, Inc. (a subsidiary of Cox Communications, Inc.), United
  Pan-Europe Communications and Crossbeam Networks Corporation, a wholly owned
  subsidiary of Sumitomo Corporation. Companies currently using our DSL products
  include major ILEC's (Incumbent Local Exchange Carriers) in the United States,
  including SBC, Bell Atlantic, Bell South, U.S. West and GTE.
  
     Our company was incorporated in California in January 1993 and
  reincorporated in Delaware in July 1998. Our executive offices are located at
  2952 Bunker Hill Lane, Santa Clara, California 95054 and our telephone number
  is (408) 727-4400. Our Web site is located at www.terayon.com. Information
  contained on our Web site does not constitute part of this offering memorandum.
  
  Recent Events
  
     We believe that the following transactions, in combination with our own
  internal development and previous acquisitions, significantly increase our
  technological expertise throughout broadband access technologies including
  cable modems, DSL and wireless broadband access:
  
    .  In January 2000, we acquired Telegate Ltd., a manufacturer of telephony
       and data access platforms that are deployed by service providers to
       deliver efficient carrier-class voice services over cable. Telegate also
       provides in-home networking capability for telephony and data, based on
       the Digital Enhanced Cordless Telephony (DECT) standard.
  
    .  In April 2000, we acquired the Access Network Electronics Division (ANE)
       of Tyco Electronics Corporation, a subsidiary of Tyco International Ltd.
       ANE produces DSL systems that allow for the provisioning of multiple
       phone lines over the existing copper telephony networks consisting of a
       single pair of copper wires that traditionally only support a single
       phone line.
  
    .  In April 2000, we acquired Combox, Ltd., a manufacturer of broadband
       data systems and satellite communications based on international
       standards. Combox's cable data access systems conform to the growing
       EuroModem international specification, based on the Digital Video
       Broadcasting (DVB) standard.
  
    .  In April 2000, we purchased certain assets of Internet Telecom Ltd., a
       supplier of PacketCable and other standards-based, voice-over-IP
       ("Internet Protocol") systems and technologies.
  
    .  In April 2000, we acquired Ultracom Communication Holdings (1995) Ltd.
       ("Ultracom"), a supplier of wireless DSL and broadband systems on
       silicon.
  
                                         3
  The section entitled Risk Factors should be deleted and replaced with the
  following section:
  
                                    RISK FACTORS
  
     Before making an investment decision, you should carefully consider the risks
  described below. The risks and uncertainties described below are not the only
  ones facing our company. Additional risks and uncertainties not presently known
  to us or that we currently deem immaterial also may impair our business
  operations. If any of the following risks actually occur, our business could be
  harmed. In such case, the trading price of our common stick could decline, and
  you may lose all or part of your investment.
  
                           Risks Related to Our Business
  
  We have a limited operating history and a history of losses.
  
     We have a limited operating history, and it is difficult to predict our
  future operating results. We began shipping products commercially in June 1997,
  and we only have been shipping products in volume since the first quarter of
  1998. As of March 31, 2000, we had an accumulated deficit of $176.8 million. We
  believe that we will continue to experience net losses for the foreseeable
  future. Most of our expenses are fixed in advance, and we generally are unable
  to reduce our expenses significantly in the short term to compensate for any
  unexpected delay or decrease in anticipated revenues. We expect to continue to
  increase expenses for the foreseeable future to support increased sales and
  marketing and technical support costs. Any significant delay in our anticipated
  revenues or commercialization of new products would harm our business. The
  revenue and profit potential of our business and our industry are unproven. We
  had negative gross margins from our inception until the fourth quarter of 1998,
  and any future revenue growth may not result in positive gross margins or
  operating profits in future periods.
  
  Our operating results may fluctuate.
  
     Our quarterly revenues are likely to fluctuate significantly in the future
  due to a number of factors, many of which are outside our control. Factors that
  could affect our revenues include the following:
  
    .  variations in the timing of orders and shipments of our products;
  
    .  variations in the size of the orders by our customers;
  
    .  new product introductions by competitors;
  
    .  delays in our introduction of new products;
  
    .  delays in our receipt of orders forecasted by our customers;
  
    .  delays by our customers in the completion of upgrades to their cable
       infrastructure;
  
    .  variations in capital spending budgets of broadband access service
       providers;
  
    .  adoption of industry standards and the inclusion in or compatibility of
       our technology with any such standards; and
  
    .  delays in obtaining regulatory approval for commercial deployment of
       cable modem systems.
  
     Our expenses generally will vary from quarter to quarter depending on the
  level of actual and anticipated business activities. Research and development
  expenses will vary as we begin development of new products and as our
  development programs move to wafer fabrication and prototype development, which
  results in higher engineering expenses.
  
                                         4
  A variety of factors affect our gross margin, including the following:
  
    .  the sales mix of our products;
  
    .  the volume of products manufactured;
  
    .  the type of distribution channel through which we sell our products;
  
    .  the average selling prices or "ASPs" of our products; and
  
    .  the effectiveness of our cost reduction measures.
  
     We anticipate that unit ASPs of our products will decline in the future.
  This could cause a decrease in the gross margins for these products. In
  addition, the maturity of TeraComm system deployments affects our gross margin.
  New deployments of the TeraComm system involve the sale of headend equipment
  (which has higher margins) and generally involve smaller quantities of product.
  New deployments typically are sold at higher margins than the larger volume
  sales of product associated with more mature deployments of the TeraComm
  system. The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways
  and TeraPro cable modems also affects our gross margin. The TeraPro cable
  modems have significantly lower margins than the TeraLink 1000 Master
  Controller and TeraLink Gateway headend products. We expect to achieve
  significantly lower margins on the TeraPro cable modems for the foreseeable
  future. Further, we expect that sales of TeraPro cable modems will continue to
  constitute a significant portion of our revenues for the foreseeable future.
  
     We also anticipate that our operating results will be impacted by sales,
  gross profit and operating expenses of acquired companies. The impact of these
  factors on our operating results will vary as we acquire additional companies.
  
  We are dependent on a small number of customers.
  
     Four customers accounted for approximately 64% of our revenues for the
  quarter ended March 31, 2000 and three customers accounted for approximately
  63% of our revenues for the quarter ended March 31, 1999. We believe that a
  substantial majority of our revenues will continue to be derived from sales to
  a relatively small number of customers for the foreseeable future. In addition,
  we believe that sales to these customers will be focused on a limited number of
  projects.
  
     The cable industry is undergoing significant consolidation in North America
  and internationally, and a limited number of cable operators controls an
  increasing number of cable systems. Currently, ten cable operators in the
  United States own and operate facilities passing approximately 86% of total
  homes passed. In addition, the North American DSL market is concentrated with
  the major ILECs, constituting a significant percentage of the market. As a
  result, our sales will be largely dependent upon product acceptance by the
  leading broadband service providers. Currently, the timing and size of each
  customer's order is critical to our operating results. Our major customers are
  likely to have significant negotiating leverage and may attempt to change the
  terms, including pricing, upon which we do business with them. These customers
  also may require longer payment terms than we anticipate, which could require
  us to raise additional capital to meet our working capital requirements.
  
  Acquisitions could result in dilution, operating difficulties and other adverse
  consequences.
  
     We have acquired seven businesses since September 1999: Imedia Corporation
  in September 1999; Radwiz in November 1999; Telegate in January 2000; ANE in
  April 2000; ComBox in April 2000; some assets of Internet Telecom in April
  2000; and Ultracom in April
  
                                         5
  2000. If appropriate opportunities present themselves, we intend to acquire
  additional businesses, technologies, services or products that we believe are
  strategic. The process of integrating any acquired business into our business
  and operations is risky and may create unforeseen operating difficulties and
  expenditures. The areas in which we may face difficulties include:
  
    .  diversion of management time (both ours and that of the acquired
       companies) during the period of negotiation through closing and after
       closing from the ongoing development of our businesses, issues of
       integration and future products;
  
    .  decline in employee morale and retention issues resulting from changes
       in compensation, reporting relationships, future prospects or the
       direction of the business;
  
     We typically sell products to our customers pursuant to purchase orders, and
  we therefore generally do not have long-term agreements in place with our
  customers.
  
    .  the need to integrate each company's accounting, management information,
       human resource and other administrative systems to permit effective
       management, and the lack of control if this integration is delayed or
       not implemented; and
  
    .  the need to implement controls, procedures and policies appropriate for
       a larger public group of companies that prior to acquisition had been
       smaller, private companies.
  
     We have very limited experience in managing this integration process.
  Moreover, the anticipated benefits of any or all of these completed or pending
  acquisitions may not be realized. Future acquisitions could result in
  potentially dilutive issuances of equity securities, the incurrence of
  additional debt, contingent liabilities or amortization expenses related to
  goodwill and other intangible assets, any of which could harm our business.
  Future acquisitions also could require us to obtain additional equity or debt
  financing, which may not be available on favorable terms or at all. Even if
  available, this financing may be dilutive.
  
  The sales cycle for our products is lengthy.
  
     The sales cycle associated with our products typically is lengthy, often
  lasting six months to a year. Our customers typically conduct significant
  technical evaluations of competing technologies prior to the commitment of
  capital and other resources. In addition, purchasing decisions may be delayed
  because of our customers' internal budget approval procedures. Sales also
  generally are subject to customer trials, which typically last three months.
  Because of the lengthy sales cycle and the large size of customers' orders, if
  orders forecasted for a specific customer for a particular quarter do not occur
  in that quarter, our operating results for that quarter could suffer.
  
  There are many risks associated with our participation in the establishment of
  advanced physical layer specifications to be added to DOCSIS.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2 (Data Over
  Cable Service Interface Specifications), an enhanced version of the DOCSIS
  cable modem specification based in part on our S-CDMA technology. In September
  1999, CableLabs indicated that it intended to proceed with the advanced
  physical layer ("PHY") work on two parallel tracks: one for the development of
  a prototype based on our S-CDMA technology and
  
                                         6
  one for the inclusion of Advanced TDMA technology (Time Division Multiple
  Access), as proposed by other companies. In February 2000, CableLabs further
  clarified the status of the advanced PHY project regarding a separate release
  that will include TDMA technologies. In addition, CableLabs reiterated that it
  is continuing to work with us on the development of a DOCSIS specification that
  could include our S-CDMA technology. To that end, CableLabs has requested that
  we submit a prototype of a DOCSIS system that incorporates an S-CDMA advanced
  PHY capability for testing. CableLabs has stated that if the testing of this
  prototype reveals that the S-CDMA advanced PHY works as claimed (including
  proper backwards compatibility and coexistence with the other aspects of
  DOCSIS), and if the costs for adding S-CDMA to DOCSIS products are in line with
  estimates, then it is likely, but not certain, that S-CDMA advanced PHY
  capabilities will be included in a future version of the DOCSIS specification.
  The prototype we submit to CableLabs may fail to demonstrate the level of
  performance that CableLabs seeks; even if it does meet performance expectations
  there can be no guarantee that CableLabs will incorporate the technology into a
  future version of DOCSIS specifications. In addition, if CableLabs does proceed
  to include S-CDMA in a future DOCSIS specification, there can be no guarantee
  that the DOCSIS S-CDMA specification will be the same as the specification we
  incorporated in the prototype submitted for tests, which may require us to
  further develop our prototype.
  
     Our future revenues and operating results are likely to suffer if S-CDMA is
  not included in a future release of DOCSIS. We also may incur substantial
  additional research and development expenditures to adapt our specifications to
  the version adopted by CableLabs. CableLabs has not established a schedule for
  adding the S-CDMA capabilities to the DOCSIS specifications. Delays in the
  establishment of a final specification for S-CDMA in DOCSIS could harm our
  plans to sell DOCSIS compatible modems and headend equipment. In particular, if
  the final DOCSIS S-CDMA specification is not approved prior to the time when we
  are ready to ship DOCSIS products with S-CDMA features included, then we may be
  required to delay the introduction of those products until the DOCSIS S-CDMA
  specification is released or to introduce the S-CDMA features as proprietary
  enhancements to a standard DOCSIS product. Either one of these events could
  harm revenues and operating results.
  
     We have already given CableLabs assurances that we will contribute some
  aspects of our proprietary S-CDMA technology to a royalty-free intellectual
  property pool, if S-CDMA is included in a future version of DOCSIS
  specifications. This royalty-free pool has been established by CableLabs to
  facilitate the participation of as many vendors as possible in providing
  equipment that is compatible with the DOCSIS specifications. As a result, any
  of our competitors who join the DOCSIS intellectual property pool would have
  access to some aspects of our technology and would not be required to pay us
  any royalties or other compensation. If a competitor is able to duplicate the
  functionality and capabilities of our technology, we could lose some or all of
  the time-to-market advantage we might otherwise have, which could harm our
  future revenues and operating results.
  
     We believe the addition of advanced upstream PHY capabilities to DOCSIS will
  increase the overall market for DOCSIS-compatible products, and as such will
  result in increased competition in the cable modem market. This competition
  could come from existing competitors or from new competitors who enter the
  market as a result of the enhancements to the specifications. This increased
  competition is likely to result in lower ASPs of cable modem systems and could
  harm revenues and gross margins. Because our competitors will be able to
  incorporate some aspects of our technology into their products, our current
  customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
  cable modems with advanced PHY capabilities from multiple suppliers. We may be
  unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
  more quickly or at lower cost than
  
                                         7
  our competitors. The inclusion of our S-CDMA technology in future DOCSIS
  specification could result in increased competition for the services of our
  existing employees who have experience with S-CDMA. The loss of these employees
  to one or more competitors could harm our business.
  
     DOCSIS standards have not yet been accepted in Europe and Asia. An alternate
  standard for cable modem systems, called the EuroModem standard, or DAVIC/DVB,
  has been formalized, and some European cable system operators have embraced it.
  We intend to develop and sell products that comply with the EuroModem standard
  and to pursue having portions of our S-CDMA technology included in a future
  version of the EuroModem standard. We may be unsuccessful in these efforts.
  
  We need to develop new products in order to remain competitive.
  
     Our future success will depend in part on our ability to develop, introduce
  and market new products in a timely manner. We also must respond to competitive
  pressures, evolving industry standards and technological advances. Our current
  S-CDMA products are not DOCSIS-compliant. We are currently developing a
  prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY
  capability for testing and eventual inclusion in the DOCSIS standard. There is
  no guarantee that we will be successful in developing the prototype or that the
  prototype, if successfully developed, will be included in a future release of
  the DOCSIS standard. We anticipate that during 2000, existing or potential
  customers may delay purchases of our TeraComm system in order to purchase
  systems that comply with the DOCSIS standard. In addition, potential new
  customers could decide to purchase DOCSIS-compliant products from one or more
  of our competitors rather than from us. As a result, our product sales in the
  second half of 2000 may be lower than we anticipate. In order to promote sales
  of our currents products we may be required to reduce our prices for sales to
  existing customers. This would harm our operating results and gross margin.
  
     As a result of the inclusion of TDMA technology in the new DOCSIS version
  announced by CableLabs in February 2000, we will have to incorporate advanced
  TDMA technology into our DOCSIS-compliant products. If we are unable to do this
  effectively, or in a timely manner, we will lose some or all of the time-to-
  market advantage we might otherwise have had.
  
     Our future success will also depend on our ability to develop and market
  products for broadband applications over DSL and wireless networks. The markets
  for these broadband applications are also subject to evolving standards, such
  as NEBS compliance in the North American DSL market, and technological advances
  in these arenas. There is no guarantee that we will be successful in developing
  products that are compliant with these standards or that we will be successful
  in keeping pace with future technological advances in this arena.
  
  Average selling prices of broadband access equipment typically decrease.
  
     The broadband access systems market has been characterized by erosion of
  average selling prices. We expect this to continue. This erosion is due to a
  number of factors, including competition, rapid technological change and price
  performance enhancements. The ASPs for our products may be lower than expected
  as a result of competitive pricing pressures, our promotional programs and
  customers who negotiate price reductions in exchange for longer term purchase
  commitments. We anticipate that ASPs and gross margins for our products will
  decrease over product life cycles. In addition, we believe that the widespread
  adoption of industry standards is likely to further erode ASPs, particularly
  for cable modems and other similar consumer premise equipment. It is likely
  that the widespread adoption of industry standards will result in increased
  retail distribution of cable modems and other similar
  
                                         8
  consumer premise equipment, which could put further price pressure on our
  products. Decreasing ASPs could result in decreased revenue even if the number
  of units sold increases. As a result, we may experience substantial period-to-
  period fluctuations in future operating results due to ASP erosion. Therefore,
  we must continue to develop and introduce on a timely basis next-generation
  products with enhanced functionalities that can be sold at higher gross
  margins. Our failure to do this could cause our revenues and gross margin to
  decline.
  
  We must achieve cost reductions.
  
     Certain of our competitors currently offer products at prices lower than
  ours. Market acceptance of our products will depend in part on reductions in
  the unit cost of our products. We expect that as headend equipment becomes more
  widely deployed, the price of cable modems and other similar consumer premise
  equipment will decline. In particular, we believe that the widespread adoption
  of industry standards such as DOCSIS will cause increased price competition for
  consumer premise equipment. However, we may be unable to reduce the cost of our
  products sufficiently to enable us to compete with other suppliers. Our cost
  reduction efforts may not allow us to keep pace with competitive pricing
  pressures or lead to gross margin improvement.
  
     Some of our competitors are larger and manufacture products in significantly
  greater quantities than we intend to for the foreseeable future. Consequently,
  these competitors have more leverage in obtaining favorable pricing from
  suppliers and manufacturers. In order to remain competitive, we must
  significantly reduce the cost of manufacturing our cable modems through design
  and engineering changes. We may not be successful in redesigning our products.
  Even if we are successful, our redesign may be delayed or may contain
  significant errors and product defects. In addition, any redesign may not
  result in sufficient cost reductions to allow us to significantly reduce the
  list price of our products or improve our gross margin. Reductions in our
  manufacturing costs will require us to use more highly integrated components in
  future products and may require us to enter into high volume or long-term
  purchase or manufacturing agreements. Volume purchase or manufacturing
  agreements may not be available on acceptable terms. We could incur expenses
  without related revenues if we enter into a high volume or long-term purchase
  or manufacturing agreement and then decide that we cannot use the products or
  services offered by such agreement.
  
  We must keep pace with rapid technological change to remain competitive.
  
     The markets for our products are characterized by rapid technological
  change, evolving industry standards, changes in end-user requirements and
  frequent new product introductions and enhancements. Our future success will
  depend upon our ability to enhance our existing products and to develop and
  introduce new products that achieve market acceptance. Providers of broadband
  access services may adopt alternative technologies or they may deploy
  alternative services that are incompatible with our products.
  
     The demand for broadband access services has resulted in the development of
  several competing modulation technologies. For example, some of our cable
  products utilize a modulation technology known as S-CDMA, while several of our
  competitors utilize modulation technologies known as TDMA and Frequency
  Division Multiple Access or "FDMA." Our headend equipment and cable modem
  products currently are not interoperable with the headend equipment and modems
  of other suppliers of broadband access products. As a result, potential
  customers who wish to purchase broadband access products from multiple
  
                                         9
  suppliers may be reluctant to purchase our products. Although our technology
  may be incorporated into a future version of a DOCSIS specification or another
  industry standard, we cannot be certain that major cable operators will adopt
  these standards. Major cable operators may not adopt products or technologies
  based on our current proprietary S-CDMA technology or on any future industry
  standard S-CDMA technology. Further, major cable operators may adopt products
  or standards technologies based on competing modulation technologies. If
  competitors using other modulation technologies can incorporate functionality
  and capabilities currently found in S-CDMA, the value of our S-CDMA technology
  would be diminished.
  
  Broadband access services have not achieved widespread market acceptance, and
  many competing technologies exist.
  
     Our success will depend upon the widespread commercial acceptance of
  broadband access services by service providers and end users of broadband
  access services. The market for these services is not fully developed. We
  cannot accurately predict the future growth rate or the ultimate size of the
  market for broadband access services. Potential users of our products may have
  concerns regarding the security, reliability, cost, ease of installation and
  use and capability of broadband access services in general.
  
     The market for our products may be impacted by the development of other
  technologies that enable the provisioning of broadband access services and the
  deployment of services over other media. Widespread acceptance of other
  technologies or deployment of services over media not supported by our products
  could materially limit acceptance of our broadband access systems. Broadband
  access services based on our products and technology may fail to gain
  widespread commercial acceptance by providers of broadband access services and
  end users. In addition, we only recently began to offer products based on
  alternate technologies such as DSL. We may not be successful in marketing and
  selling these products.
  
  We need to develop additional distribution channels.
  
     We presently market our TeraComm system to cable operators and systems
  integrators. We believe that much of the North American cable modem market may
  shift to a retail distribution model. Accordingly, we may need to redirect our
  future marketing efforts to sell our cable modems directly to retail
  distributors and end users. This shift would require us to establish new
  distribution channels for our products. We may be unable to establish these
  additional distribution channels. If we do establish them, we may be unable to
  hire the additional personnel necessary to foster and enhance such distribution
  channels. In addition, if the cable modem market shifts to a retail
  distribution model, we may not successfully establish a retail distribution
  presence. To the extent that large consumer electronics companies enter the
  cable modem market, their well-established retail distribution capabilities
  would provide them with a significant competitive advantage.
  
  We may be unable to market effectively to broadband access service providers.
  
     Our growth and future success will be substantially dependent upon our
  ability to convince providers of broadband access services to adopt our
  technologies, purchase our products and effectively market our products to end
  users. Our potential customers are likely to prefer purchasing products from
  established manufacturing companies that can demonstrate the capability to
  supply large volumes of products on short notice. In addition, many of our
  potential customers may be reluctant to adopt technologies that have not gained
  acceptance among other providers of similar services. This reluctance could
  result in lengthy product testing and acceptance cycles for our products.
  Consequently, the impediments to our initial sales may be even greater than
  those to later sales.
  
                                         10
  No established distribution network in the cable modem industry exists that
  would provide us with easy access to smaller or geographically diverse cable
  operators. Therefore, our initial sales to larger, more established cable
  operators are critical to our business. Although we intend to establish
  strategic relationships with leading distributors worldwide, we may not succeed
  in establishing these relationships. Even if we do establish these
  relationships, the distributors may not succeed in marketing our products to
  cable operators. Some of our competitors have already established relationships
  with certain cable operators. These established relationships may further limit
  our ability to sell products to those cable operators. We do not have long,
  well-established relationships with those cable operators. If we were to sell
  our products to those cable operators, it would likely not be based on long-
  term contracts and those customers would be able to terminate their
  relationships with us at any time. In addition, one or more of our current
  customers could cancel its relationship with us at any time.
  
     We have recently begun marketing and selling our products to providers of
  DSL and wireless broadband services and thus we have very limited experience.
  We do not have long, well-established relationships with these providers, and
  we may not be successful in establishing these relationships.
  
  We are dependent on broadband service providers choosing to offer additional
  services to their customers.
  
     We depend on cable operators to purchase our cable modem systems and to
  provide our cable modems to end users. Cable operators have a limited amount of
  available bandwidth over which they can offer robust data services, and they
  may not choose to provide these data services to their customers. If cable
  operators choose to provide these services, we also will depend upon them to
  market these services to cable customers, to install our equipment and to
  provide support to end users. In addition, we will be highly dependent on cable
  operators to continue to maintain their cable infrastructure in a manner that
  allows us to provide consistently high performance and reliable services. Our
  success also will depend upon the acceptance of our products by other providers
  of services to the cable industry, such as Excite@Home's @Home Network and Road
  Runner, a joint venture between MediaOne Group, Inc. and Time Warner Cable.
  Sales of our DSL and wireless products are also dependent on service providers
  choosing to purchase our products and to provide additional services to their
  end users.
  
  Sales of our cable products are dependent on the cable industry upgrading to
  two-way cable infrastructure.
  
     Demand for our products will depend, to a significant degree, upon the
  magnitude and timing of capital spending by cable operators for implementation
  of access systems for data transmission over cable networks. This involves the
  enabling of two-way transmission over existing coaxial cable networks and the
  eventual upgrade to HFC in areas of higher penetration of data services. If
  cable operators fail to complete these upgrades of their cable infrastructures
  in a timely and satisfactory manner, the market for our products could be
  limited. In addition, few businesses in the United States currently have cable
  access. Cable operators may not choose to upgrade existing residential cable
  systems or to install new cable systems to serve business locations.
  
     The success and future growth of our business will be subject to economic
  and other factors affecting the cable television industry generally,
  particularly its ability to finance substantial capital expenditures. Capital
  spending levels in the cable industry in the United
  
                                         11
  States have fluctuated significantly in the past, and we believe that such
  fluctuations will occur in the future. The capital spending patterns of cable
  operators are dependent on a variety of factors, including the following:
  
    .  the availability of financing;
  
    .  cable operators' annual budget cycles, as well as the typical reduction
       in upgrade projects during the winter months;
  
    .  the status of federal, local and foreign government regulation and
       deregulation of the telecommunications industry;
  
    .  overall demand for cable services;
  
    .  competitive pressures (including the availability of alternative data
       transmission and access technologies);
  
    .  discretionary consumer spending patterns; and
  
    .  general economic conditions.
  
     In recent periods, the United States cable market has been characterized by
  the acquisition of smaller and independent cable operators by large cable
  operators. We cannot predict the effect, if any, that consolidation in the
  United States cable industry will have on overall capital spending patterns by
  cable operators. The effect on our business of further industry consolidation
  also is uncertain.
  
  Supply of our products may be limited by our ability to forecast demand
  accurately.
  
     The emerging nature of the broadband access services market makes it
  difficult for us to accurately forecast demand for our products. Our inability
  to accurately forecast the actual demand for our products could result in
  supply, manufacturing or testing capacity constraints. These constraints could
  result in delays in the delivery of our products or the loss of existing or
  potential customers, either of which could have a negative impact on our
  business, operating results or financial condition. In addition, we had
  unconditional purchase obligations of approximately $125.7 million as of March
  31, 2000, primarily to purchase minimum quantities of materials and components
  used to manufacture our products. We must fulfill these obligations even if
  demand for our products is lower than we anticipate.
  
  We are dependent on key third-party suppliers.
  
     We manufacture all of our products using components or subassemblies
  procured from third-party suppliers. Some of these components are available
  from a single source and others are available from limited sources. All of our
  sales are from products containing one or more components that are available
  only from single supply sources. In addition, some of the components are custom
  parts produced to our specifications. For example, we currently rely on Philips
  Semiconductors, Inc. to supply a custom ASIC that is used in our products.
  Other components, such as the radio frequency tuner and some surface acoustic
  wave filters, are procured from sole source suppliers. Any interruption in the
  operations of vendors of sole source parts could adversely affect our ability
  to meet our scheduled product deliveries to customers. We are dependent on
  semiconductor manufacturers and are affected by worldwide conditions in the
  semiconductor market. If we are unable to obtain a sufficient supply of
  components from our current sources, we could experience difficulties in
  obtaining alternative sources or in altering product designs to use alternative
  components. Resulting delays or reductions in product shipments could damage
  customer relationships. Further, a significant increase in the price of one or
  more of these components could harm our gross margin or operating results.
  
                                         12
  Shortages in supplies of components may impair our ability to meet customer
  demands.
  
     Due to increasing demand for electronic and communications equipment, the
  worldwide market for component parts is currently constrained. Delays in key
  component or product deliveries may occur due to shortages resulting from a
  limited number of suppliers, the financial or other difficulties of such
  suppliers or a limitation in component product availability. Due to these
  current market conditions, we face the risk of possible shortages of certain
  key components that could result in product performance shortfalls and reduced
  control over or delay in delivery schedules, manufacturing capability, quality
  and costs, all of which could impair our ability to produce enough product to
  meet our customer demand. In addition, in order to fulfill demand for our
  products, we may have to purchase these components on the spot market at a
  price that may be higher than we have experienced in the past.
  
     Although we work closely with our suppliers to avoid these types of
  shortages, there can be no assurance that we will not encounter these problems
  in the future. While our suppliers have performed effectively and been
  relatively flexible to date, we believe that we will be faced with the
  following challenges going forward:
  
    .  New markets in which we participate may grow quickly and consume
       component capacity; and
  
    .  As we continue to acquire companies and new technologies, we are
       dependent, at least initially, on unfamiliar supply chains or relatively
       small supply partners.
  
     Manufacturing capacity and component supply constraints could be significant
  issues for us. If we were unable to obtain adequate quantities of significant
  component materials on a timely basis, our business and our customer
  relationships would be adversely affected. If we are unable to satisfy our
  customers' demand, our customers could decide to purchase products from our
  competitors. Inability to meet demand, or a decision by one or more of our
  customers to purchase from our competitors, could harm our operating results.
  
  We may be unable to migrate to new semiconductor process technologies
  successfully or on a timely basis.
  
     Our future success will depend in part upon our ability to develop products
  that utilize new semiconductor process technologies. These technologies change
  rapidly and require us to spend significant amounts on research and
  development. We continuously evaluate the benefits of redesigning our
  integrated circuits using smaller geometry process technologies to improve
  performance and reduce costs. The transition of our products to integrated
  circuits with increasingly smaller geometries will be important to our
  competitive position. Other companies have experienced difficulty in migrating
  to new semiconductor processes and, consequently, have suffered reduced yields,
  delays in product deliveries and increased expense levels. Moreover, we depend
  on our relationship with our third-party manufacturers to migrate to smaller
  geometry processes successfully.
  
  Our ability to directly control product delivery schedules and product quality
  is dependent on third-party contract manufacturers.
  
     Most of our products are assembled and tested by contract manufacturers
  using testing equipment that we provide. As a result of our dependence on these
  contract manufacturers for assembly and testing of our products, we do not
  directly control product delivery schedules or product quality. Any product
  shortages or quality assurance problems could increase the costs of
  manufacture, assembly or testing of our products. In addition, as manufacturing
  volume increases, we will need to procure and assemble additional testing
  equipment and provide it
  
                                         13
  to our contract manufacturers. The production and assembly of testing equipment
  typically requires significant time. We could experience significant delays in
  the shipment of our products if we are unable to provide this testing equipment
  to our contract manufacturers in a timely manner.
  
  There are many risks associated with international operations.
  
     Sales to customers outside of the United States accounted for approximately
  84% of our revenues in 1999 and approximately 74% of our revenues in 1998. We
  expect sales to customers outside of the United States to continue to represent
  a significant percentage of our revenues for the foreseeable future.
  International sales are subject to a number of risks, including the following:
  
    .  changes in foreign government regulations and communications standards;
  
    .  export license requirements, tariffs and taxes;
  
    .  other trade barriers;
  
    .  difficulty in protecting intellectual property;
  
    .  difficulty in collecting accounts receivable;
  
    .  difficulty in managing foreign operations; and
  
    .  political and economic instability.
  
     If our customers are affected by currency devaluations or general economic
  crises, such as the recent economic crisis affecting many Asian and Latin
  American economies, their ability to purchase our products could be reduced
  significantly. Payment cycles for international customers typically are longer
  than those for customers in the United States. Foreign markets for our products
  may develop more slowly than currently anticipated. Foreign countries may
  decide not to construct cable infrastructure or may prohibit, terminate or
  delay the construction of new cable plants for a variety of reasons. These
  reasons include environmental issues, economic downturns, the availability of
  favorable pricing for other communications services or the availability and
  cost of related equipment. Any action like this by foreign countries would
  reduce the market for our products.
  
     We anticipate that our foreign sales generally will be invoiced in U.S.
  dollars, and we currently do not plan to engage in foreign currency hedging
  transactions. However, as we commence and expand our international operations,
  we may be paid in foreign currencies and exposure to losses in foreign currency
  transactions may increase. We may choose to limit our exposure by the purchase
  of forward foreign exchange contracts or through similar hedging strategies. No
  currency hedging strategy can fully protect against exchange-related losses. In
  addition, if the relative value of the U.S. dollar in comparison to the
  currency of our foreign customers should increase, the resulting effective
  price increase of our products to those foreign customers could result in
  decreased sales.
  
  We may be unable to provide adequate customer support.
  
     Our ability to achieve our planned sales growth and retain current and
  future customers will depend in part upon the quality of our customer support
  operations. Our customers generally require significant support and training
  with respect to our broadband access systems, particularly in the initial
  deployment and implementation stages. To date our sales have been concentrated
  in a small number of customers. We have limited experience with widespread
  deployment of our products to a diverse customer base. We may not have
  
                                         14
  adequate personnel to provide the levels of support that our customers may
  require during initial product deployment or on an ongoing basis. Our inability
  to provide sufficient support to our customers could delay or prevent the
  successful deployment of our products. In addition, our failure to provide
  adequate support could harm our reputation and relationship with our customers
  and could prevent us from gaining new customers.
  
  Our industry is highly competitive with many established competitors.
  
     The market for broadband access systems is extremely competitive and is
  characterized by rapid technological change. Our direct competitors in the
  cable access systems arena include Cisco Systems, Com21, General Instrument,
  Matsushita Electric Industrial (which markets products under the brand name
  "Panasonic"), Motorola, Nortel Networks, Vyyo, Thomson Consumer Electronics
  (which markets products under the brand name "RCA"), Samsung, Scientific-
  Atlanta, Sony, 3Com, Toshiba and Zenith Electronics. We also compete with
  companies that develop integrated circuits for broadband access products, such
  as Broadcom, Conexant and Texas Instruments. We also sell products that compete
  with existing data access and transmission systems utilizing the
  telecommunications networks, such as those of 3Com. Additionally, our
  controller and headend system products face intense competition from well-
  established companies such as Cisco, Nortel and 3Com. In addition, we compete
  with companies in the DSL arena such as ECI, Charles Industries, Pairgain,
  Copper Mountain, Accelerated Networks, Integral Access and VINA Technologies.
  As standards, such as DOCSIS, are developed for broadband access systems, other
  companies may enter the broadband access systems market. The principal
  competitive factors in our market include the following:
  
    .  product performance, features and reliability;
  
    .  price;
  
    .  size and stability of operations;
  
    .  breadth of product line;
  
    .  sales and distribution capability;
  
    .  technical support and service;
  
    .  relationships with providers of broadband access services; and
  
    .  compliance with industry standards.
  
     Some of these factors are outside of our control. The existing conditions in
  the broadband access market could change rapidly and significantly as a result
  of technological advancements. The development and market acceptance of
  alternative technologies could decrease the demand for our products or render
  them obsolete. Our competitors may introduce broadband access products that are
  less costly, provide superior performance or achieve greater market acceptance
  than our products.
  
     Many of our current and potential competitors have significantly greater
  financial, technical, marketing, distribution, customer support and other
  resources, as well as greater name recognition and access to customers than we
  do. The anticipated widespread adoption of DOCSIS and other industry standards
  is likely to cause increased worldwide price competition, particularly in the
  North American market. The adoption of DOCSIS and these other standards also
  could result in lower sales of our TeraComm system, including the higher margin
  headend products. Any increased price competition or reduction in sales of our
  headend products would result in downward pressure on our gross margin. We
  cannot accurately predict how the competitive pressures that we face will
  affect our business.
  
                                         15
  Our business is dependent on the Internet and the development of the Internet
  infrastructure.
  
     Our success will depend in large part on increased use of the Internet to
  increase the need for high speed broadband access networks. Critical issues
  concerning the commercial use of the Internet remain largely unresolved and are
  likely to affect the development of the market for our products. These issues
  include security, reliability, cost, ease of access and quality of service. Our
  success also will depend on the growth of the use of the Internet by
  businesses, particularly for applications that utilize multimedia content and
  thus require high bandwidth. The recent growth in the use of the Internet has
  caused frequent periods of performance degradation. This has required the
  upgrade of routers, telecommunications links and other components forming the
  infrastructure of the Internet by Internet service providers and other
  organizations with links to the Internet. Any perceived degradation in the
  performance of the Internet as a whole could undermine the benefits of our
  products. Potentially increased performance provided by our products and the
  products of others ultimately is limited by and reliant upon the speed and
  reliability of the Internet backbone itself. Consequently, the emergence and
  growth of the market for our products will depend on improvements being made to
  the entire Internet infrastructure to alleviate overloading and congestion.
  
  Our failure to manage growth could adversely affect us.
  
     The growth of our business has placed, and is expected to continue to place,
  a significant strain on our limited personnel, management and other resources.
  Our management, personnel, systems, procedures and controls may be inadequate
  to support our existing and future operations. To manage any future growth
  effectively, we will need to attract, train, motivate, manage and retain
  employees successfully, to integrate new employees into our overall operations
  and to continue to improve our operational, financial and management systems.
  
  We are dependent on key personnel.
  
     Due to the specialized nature of our business, we are highly dependent on
  the continued service of, and on the ability to attract and retain qualified
  engineering, sales, marketing and senior management personnel. The competition
  for personnel is intense. The loss of any of these individuals, particularly
  our Chairman, President and Chief Technical Officer, Shlomo Rakib, and our
  Chief Executive Officer, Zaki Rakib, would harm our business. In addition, if
  we are unable to hire additional qualified personnel as needed, we may be
  unable to adequately manage and complete our existing sales commitments and to
  bid for and execute additional sales. Further, we must train and manage our
  growing employee base, which is likely to require increased levels of
  responsibility for both existing and new management personnel. Our current
  management personnel and systems may be inadequate, and we may fail to
  assimilate new employees successfully.
  
     Highly skilled employees with the education and training that we require,
  especially employees with significant experience and expertise in both data
  networking and radio frequency design, are in high demand. We may not be able
  to continue to attract and retain the qualified personnel necessary for the
  development of our business. We do not have "key person" insurance coverage for
  the loss of any of our employees. Any officer or employee of our company can
  terminate his or her relationship with us at any time. Our employees generally
  are not bound by non-competition agreements with us.
  
  Our business is subject to the risks of product returns, product liability and
  product defects.
  
     Products as complex as ours frequently contain undetected errors or
  failures, especially when first introduced or when new versions are released.
  Despite testing, errors may occur.
  
                                         16
  The occurrence of errors could result in product returns and other losses to
  our company or our customers. This occurrence also could result in the loss of
  or delay in market acceptance of our products. Due to the recent introduction
  of our products, we have limited experience with the problems that could arise
  with this generation of products. However, the limitation of liability
  provision contained in our purchase agreements may not be effective as a result
  of federal, state or local laws or ordinances or unfavorable judicial decisions
  in the United States or other countries. We have not experienced any product
  liability claims to date, but the sale and support of our products entails the
  risk of such claims. In addition, any failure by our products to properly
  perform could result in claims against us by our customers. We maintain
  insurance to protect against certain claims associated with the use of our
  products, but our insurance coverage may not adequately cover any claim
  asserted against us. In addition, even claims that ultimately are unsuccessful
  could result in our expenditure of funds in litigation and management time and
  resources.
  
  We may be unable to adequately protect or enforce our intellectual property
  rights.
  
     We rely on a combination of patent, trade secret, copyright and trademark
  laws and contractual restrictions to establish and protect proprietary rights
  in our products. Our pending patent applications may not be granted. Even if
  they are granted, the claims covered by the patents may be reduced from those
  included in our applications. Any patent might be subject to challenge in court
  and, whether or not challenged, might not be broad enough to prevent third
  parties from developing equivalent technologies or products without taking a
  license from us. We have entered into confidentiality and invention assignment
  agreements with our employees, and we enter into non-disclosure agreements with
  some of our suppliers, distributors and appropriate customers so as to limit
  access to and disclosure of our proprietary information. These statutory and
  contractual arrangements may not prove sufficient to prevent misappropriation
  of our technology or to deter independent third-party development of similar
  technologies. In addition, the laws of some foreign countries might not protect
  our products or intellectual property rights to the same extent as do the laws
  of the United States. Protection of our intellectual property might not be
  available in every country in which our products might be manufactured,
  marketed or sold.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
  version of the DOCSIS cable modem specification based in part on our S-CDMA
  technology. In September 1999, CableLabs indicated that it intended to proceed
  with the advanced PHY work on two parallel tracks: one for the development of a
  prototype based on our S-CDMA technology and one for the inclusion of Advanced
  TDMA technology, as proposed by other companies. In February 2000, CableLabs
  further clarified the status of the advanced PHY project regarding a separate
  release that will include TDMA technologies. In addition, CableLabs reiterated
  that it is continuing to work with us on the development of a DOCSIS
  specification that could include our S-CDMA technology. To that end, we have
  indicated to CableLabs that we would contribute some aspects of our S-CDMA
  technology to the DOCSIS intellectual property pool if and when a DOCSIS
  specification is approved that includes our S-CDMA technology.
  
     We would contribute our technology pursuant to a license agreement with
  CableLabs that we would execute at that time, and which contains the terms that
  CableLabs has established for the inclusion of any intellectual property from
  any source in the DOCSIS specifications. Under the terms of the proposed
  license agreement, we would grant to CableLabs a royalty-free license for those
  aspects of our S-CDMA technology that are essential for compliance with the
  DOCSIS cable modem standard. So-called "implementation know how" is not covered
  by this license-only those aspects of the technology that are essential to
  implementing a
  
                                         17
  compliant product. CableLabs would have the right to extend royalty-free
  sublicenses to companies that wish to build DOCSIS-compatible products. These
  sublicenses would allow participating companies to utilize and incorporate the
  essential portions of the S-CDMA technology on a royalty-free basis for the
  limited use of making and selling products or systems that comply with the
  DOCSIS cable modem specification. Terayon has already joined the DOCSIS
  intellectual property pool and, as a result, we have a royalty-free sublicense
  that allows us to ship DOCSIS-compatible products which contain intellectual
  property submitted by other companies. The scope of this license would not
  extend to the use of the S-CDMA technology in other areas; only for products
  that comply with the DOCSIS specifications. As a result, any of our competitors
  who join or have joined the DOCSIS intellectual property pool will have access
  to some aspects of our technology without being required to pay us any
  royalties or other compensation. If and when we submit S-CDMA to the DOCSIS
  Intellectual Property pool, we are in no way restricted from entering into
  royalty-bearing license agreements with companies that wish to use the S-CDMA
  technology for purposes other than implementing DOCSIS compatible products, or
  that do not wish to enter into the DOCSIS intellectual property pool. Further,
  some of our competitors have been successful in reverse engineering the
  technology of other companies, and the inclusion of S-CDMA in a future DOCSIS
  specification would expose some aspects of our technology to those competitors.
  DOCSIS specifications are available on an open basis once they are approved,
  not only to companies that are members of the DOCSIS IP Pool. If a competitor
  is able to duplicate the functionality and capabilities of our technology, we
  could lose all or some of the time-to-market advantage we might otherwise have.
  Under the terms of the proposed license agreement, if we sue certain parties to
  the proposed license agreement on claims of infringement of any copyright or
  patent right or misappropriation of any trade secret, those parties may
  terminate our license to the patents or copyrights they contributed to the
  DOCSIS intellectual property pool. If a termination like this were to occur, we
  would continue to have access to some aspects of the DOCSIS intellectual
  property pool, but we would not be able to develop products that fully comply
  with the DOCSIS cable modem specification. Also, even if we were to be removed
  from the IP pool, we would not be prevented from developing and selling
  products that fully comply with the DOCSIS specifications, but we would not be
  able to do this with the benefit of a royalty-free license, which would
  increase the cost of our products, assuming we were able to obtain a license
  agreement for the required technology. Because of these terms, we may find it
  difficult to enforce our intellectual property rights against certain
  companies, even in areas that are not directly related to DOCSIS specifications
  and products.
  
     We anticipate that developers of cable modems increasingly will be subject
  to infringement claims as the number of products and competitors in our
  industry segment grows. We have received letters from two individuals claiming
  that our technology infringes patents held by these individuals. We have
  reviewed the allegations made by these individuals and, after consulting with
  our patent counsel, we do not believe that our technology infringes any valid
  claim of these individuals' patents. If the issues are submitted to a court,
  the court could find that our products infringe these patents. In addition,
  these individuals may continue to assert infringement. If we are found to have
  infringed these individuals' patents, we could be subject to substantial
  damages and/or an injunction preventing us from conducting our business. In
  addition, other third parties may assert infringement claims against us in the
  future. An infringement claim, whether meritorious or not, could be time-
  consuming, result in costly litigation, cause product shipment delays or
  require us to enter into royalty or licensing agreements. These royalty or
  licensing agreements may not be available on terms acceptable to us or at all.
  Litigation also may be necessary to enforce our intellectual property rights.
  
     We pursue the registration of our trademarks in the United States and have
  applications pending to register several of our trademarks. However, the laws
  of certain foreign countries
  
                                         18
  might not protect our products or intellectual property rights to the same
  extent as the laws of the United States. This means that effective trademark,
  copyright, trade secret and patent protection might not be available in every
  country in which our products might be manufactured, marketed or sold.
  
  Our business is subject to communications industry regulations.
  
     Our business and our customers are subject to varying degrees of federal,
  state and local regulation. The jurisdiction of the Federal Communications
  Commission extends to the communications industry, including our broadband
  access products. The FCC has promulgated regulations that, among other things,
  set installation and equipment standards for communications systems. Although
  FCC regulations and other governmental regulations have not materially
  restricted our operations to date, future regulations applicable to our
  business or our customers could be adopted by the FCC or other regulatory
  bodies. For example, FCC regulatory policies affecting the availability of
  cable services and other terms on which cable companies conduct their business
  may impede our penetration of certain markets. In addition, regulation of cable
  television rates may affect the speed at which cable operators upgrade their
  cable infrastructures to two-way HFC. In addition, the increasing demand for
  communications systems has exerted pressure on regulatory bodies worldwide to
  adopt new standards for such products and services. This process generally
  involves extensive investigation of and deliberation over competing
  technologies. The delays inherent in this governmental approval process have in
  the past, and may in the future, cause the cancellation, postponement or
  rescheduling of the installation of communications systems by our customers.
  
     If other countries begin to regulate the cable modem industry more heavily
  or introduce standards or specifications with which our products do not comply,
  we will be unable to offer products in those countries until our products
  comply with those standards or specifications. In addition, we may have to
  incur substantial costs to comply with those standards or specifications. For
  instance, should the DAVIC standards for ATM-based digital video be established
  internationally, we will need to conform our cable modems to compete. Further,
  many countries do not have regulations for installation of cable modem systems
  or for upgrading existing cable network systems to accommodate our products.
  Whether we currently operate in a country without these regulations or enter
  into the market in a country these regulations do not exist, new regulations
  could be proposed at any time. The imposition of regulations like this could
  place limitations on a country's cable operators' ability to upgrade to support
  our products. Cable operators in these countries may not be able to comply with
  these regulations, and compliance with these regulations may require a long,
  costly process. For example, we experienced delays in product shipments to a
  customer in Brazil due to delays in certain regulatory approvals in Brazil.
  Similar delays could occur in other countries in which we market or plan to
  market our products. In addition, our customers in certain parts of Asia, such
  as Japan, are required to obtain licenses prior to selling our products, and
  delays in obtaining required licenses could harm our ability to sell products
  to these customers.
  
  Our business is subject to other regulatory approvals and certifications.
  
     In the United States, in addition to complying with FCC regulations, our
  products are required to meet certain safety requirements. For example, we are
  required to have our products certified by Underwriters Laboratory in order to
  meet federal requirements relating to electrical appliances to be used inside
  the home. Outside the United States, our products are subject to the regulatory
  requirements of each country in which the products are manufactured or sold.
  These requirements are likely to vary widely. We may be unable to obtain on a
  timely basis or at all the regulatory approvals that may be required for the
  
                                         19
  manufacture, marketing and sale of our products. In addition to regulatory
  compliance, some cable industry participants may require certification of
  compatibility.
  
  We are vulnerable to earthquakes and other natural disasters.
  
     The facility housing our corporate headquarters, the majority of our
  research and development activities and our in-house manufacturing operations
  is located in an area of California known for seismic activity. In addition,
  the operations of some of our key suppliers are also located in this area and
  in other areas know for seismic activity, such as Taiwan. An earthquake, or
  other significant natural disaster, could result in an interruption in our
  business or that of one or more of our key suppliers. Such an interruption
  could harm our operating results.
  
                                         20
  Forms 10(K) and 10(Q)
  
    The Company hereby amends Form 10-K filed on March 30, 2000 and Form 10-Q
  filed on May 15, 2000 and any amendments filed thereon to revise the sections,
  where applicable, entitled Business, Management's Discussion and Analysis of
  Financial Condition and Results of Operations and Certain Business Risk.
  
    The section entitled Business should be deleted and replaced with the
  following section:
  
                                      BUSINESS
  
  Overview
  
     We develop, market and sell broadband access systems that enable cable
  operators and other providers of broadband access services to cost effectively
  deploy reliable broadband access services over cable, copper wire utilizing DSL
  and wireless systems. We have substantial development and marketing resources
  focused on cable operators. However, through internal development and recent
  acquisitions of complementary technology and businesses, we also are focusing
  on service providers that offer broadband access through existing copper wire
  infrastructures and wireless systems.
  
     Our primary product is the TeraComm system, which is based on our patented
  S-CDMA technology. Our S-CDMA technology enables reliable two-way broadband
  data communications over both pure coaxial and hybrid fiber/coax cable
  infrastructure and is designed to enable cable operators to maximize the
  capacity and reliability of broadband data services over any cable plant. In
  furtherance of our strategy to provide a complete portfolio of broadband
  products, we have recently completed several acquisitions of complementary
  broadband technologies, including digital video management systems, DSL and
  wireless.
  
     We sell our broadband access products to cable operators and other providers
  of broadband access services through direct sales forces in North America,
  South America Europe and Asia. We also distribute our products via distributors
  and systems integrators. Companies currently using or distributing our TeraComm
  system include Rogers, Shaw, TCA Cable TV (a subsidiary of Cox Communications,
  Inc.), UPC and Crossbeam, a wholly owned subsidiary of Sumitomo. Companies
  currently using our DSL products include major ILEC's (Incumbent Local Exchange
  Carriers) in the U.S. including SBC, Bell Atlantic, Bell South, U.S. West and
  GTE.
  
  Industry Background
  
   Demand for Broadband Access
  
     In recent years, the volume of bandwidth intensive data, voice and video
  traffic across cable infrastructures, the Internet, corporate intranets and
  other public networks has increased dramatically. This demand has been driven
  by the proliferation of residential and commercial users that are accessing
  networks for a variety of applications, including voice, video and data
  communication via the Internet, electronic commerce, telecommuting and
  interactive television. For example, International Data Corporation, estimates
  that the number of worldwide Internet users will increase from approximately
  200 million at the end of 2000 to over one billion by the end of 2005. IDC
  estimates that the number of homes in the United States with broadband access
  will increase from two million at the end of 1999 to 20 million by the end of
  2003. The rapid evolution of broadband has resulted in cable operators,
  providers of telephone services and other service providers seeking to provide
  a bundle of voice, data and video services to their residential and commercial
  subscribers over existing and new infrastructures.
  
     Despite significant advances in the performance of computer processors and
  data backbone networks, high speed data transmission has been limited by the
  existing local access network infrastructure (also known as the last mile),
  which is not optimized for distribution of data-intensive multimedia content.
  Users of dial-up analog modems with
  
                                         21
  maximum data rates of only 56 Kbps often experience frustration, as they
  encounter frequent and lengthy delays or complete failures in transmission. In
  response to the growing demand for increased bandwidth, service providers are
  now deploying new broadband access technologies, such as DSL, cable modems and
  wireless devices, that can deliver performance that is from 50 to 100 times
  faster than analog modems. According to industry analysts, the market for
  broadband access equipment is expected to increase from approximately
  $4 billion at the end of 1999 to approximately $11 billion in 2004.
  
   Emergence of Broadband Technologies
  
     As residential and commercial demand for increased bandwidth and faster
  access continues to grow, particularly for applications such as streaming audio
  and video, IP telephony and interactive two-way video, service providers are
  investing in enabling infrastructure and technologies. Various technologies
  have emerged to address the need for broadband access across cable, copper wire
  and wireless platforms or networks.
  
     Cable operators market high speed cable modems that use the existing
  television cable plant to provide subscribers access to the Internet, digital
  video, telephony and other broadband services. Similarly, telephone companies
  offer comparable services using DSL technology over the existing copper wire
  infrastructure. Wireless operators also are establishing high speed Internet
  access using both terrestrial and satellite systems to connect subscribers to
  voice, video and data services.
  
     The competition between cable operators, telephone companies and emerging
  wireless service providers is expected to intensify as the demand for broadband
  access grows. Cable operators benefit from the fact that the cable
  infrastructure passes over 95% of the homes in the United States and a large
  number of small businesses. In addition, the cable infrastructure has the
  potential to offer a wide range of broadband services, such as digital TV,
  Internet access and IP telephony. Similarly, DSL providers benefit from the
  fact that existing copper lines reach a substantial majority of U.S. homes.
  Wireless, in contrast, does not depend on existing cable or telephone line
  infrastructure and can be quickly deployed in homes and businesses that
  otherwise might not have broadband access, particularly for international
  markets. Although the market for broadband access services is becoming
  increasingly competitive, industry analysts expect each platform to experience
  significant growth over the next five years.
  
   Challenges in Deploying Broadband Access Services
  
     Service providers must overcome numerous challenges in order to successfully
  meet the increasing demand for broadband access services. Among other things,
  these service providers must do the following:
  
    .  provide end-users with a broad range of bundled services;
  
    .  capitalize on available bandwidth to provide a variety of services;
  
    .  rapidly deploy services to their customers; and
  
    .  provide reliable and cost-effective access.
  
  The Terayon Solution
  
     Our products are designed to enable cable operators and other providers of
  broadband access services to cost-effectively deploy reliable broadband
  services over cable, DSL and wireless systems. Until recently, our development
  and marketing efforts were focused
  
                                         22
  primarily on cable operators. As a result of some recent acquisitions of
  complementary technology and businesses, we also are focusing on providers of
  broadband services using existing telephone, DSL and wireless systems.
  
     Our products offer cable operators and other broadband providers the
  following advantages:
  
     Enable enriched set of bundled services.  Our broadband access platforms are
  designed to enable service providers to deliver a broad range of voice, video
  and data services over either a cable, DSL or wireless network. Service
  providers are able to reduce their total network costs because they can deliver
  additional services without investing in separate network infrastructures. In
  addition, because our broadband access platforms facilitate the bundling of
  voice, video and data services, service providers are better able to increase
  their revenues and differentiate themselves by offering tailored services and a
  single point of contact to customers.
  
     Maximize bandwidth utilization. Our broadband access platforms allow cable
  operators, telecommunications carriers and other providers of broadband
  services to optimize utilization of the available bandwidth for data access,
  digital video, and voice services. For example, through our proprietary S-CDMA
  technology, cable operators can maximize the use of the upstream return path
  using the lowest frequency ranges of the upstream spectrum, where noise is
  typically too severe to operate. This use of the upstream spectrum is key to
  delivering efficient interactive data services. Our Cherrypicker digital video
  management systems allow cable operators to flexibly manage bandwidth by
  allowing them to customize digital video programming for their target
  demographics.
  
     Enable rapid time to market of new services. Our broadband access products
  are designed to enable service providers to achieve rapid time to market and
  offer additional voice, video and data services as they become available, by
  leveraging existing plant and infrastructure. The rapid deployment of broadband
  services is a key competitive advantage to our customers.
  
     Provide reliable and cost effective solutions. Our solutions are designed to
  provide a high degree of reliability in a cost-effective manner. Our cable
  modem system allows cable operators to deploy data services over a wide variety
  of plant conditions, thus reducing ongoing maintenance costs and minimizing
  service problems. Due to their reliability, our DSL systems enable service
  providers to deliver mission-critical services, such as toll-quality local and
  long distance voice over DSL to their customers. Wireless systems are the most
  cost-effective means for delivering broadband access services to customers who
  cannot otherwise access existing cable and telephone infrastructure,
  particularly in rural areas and developing countries.
  
  Strategy
  
     Our objective is to be the leading provider of broadband systems to cable
  operators, providers of telephone services and other service providers seeking
  to provide broadband services to residential and commercial end users. Key
  elements of our strategy are as follows:
  
     Build a complete portfolio of broadband products. We are building a complete
  portfolio of broadband products to support high speed delivery of voice, video
  and data services over cable, copper wire and wireless infrastructures through
  internal development efforts and strategic acquisitions. Until recently our
  internal development efforts have focused on developing our proprietary S-CDMA
  technology for cable modems and extending this technology to a standards-based
  environment. Our future development efforts will be focused on the development
  of new technologies for the delivery of voice, video and data over any
  
                                         23
  broadband medium. In furtherance of this strategy, during the last year we have
  made several acquisitions of broadband technologies including digital video
  management systems, DSL and wireless.
  
     Supply leading broadband service providers worldwide. We target the largest
  broadband service providers in each major geographic area worldwide. Three of
  the largest North American cable operators, Rogers, Shaw and TCA Cable TV (a
  subsidiary of Cox Communications, Inc.) are deploying our TeraComm cable modem
  system. In Japan, through our partner Sumitomo, we have established ourselves
  as a market leader. In Europe, Our TeraComm system is being deployed by UPC,
  one of Europe's largest broadband communications companies. We market our DSL
  products to leading providers of telephony services throughout the world. The
  acquisition of ANE provides us with a strong customer presence in the U.S.
  communications market. Our customers include the major U.S. ILECs (Incumbent
  Local Exchange Carriers), including SBC, Bell Atlantic, Bell South, U.S. West
  and GTE.
  
     Increase presence in existing and new markets. We intend to increase our
  presence in new and existing markets throughout North America, Europe, Asia and
  South America. We currently sell our products in over 20 countries worldwide.
  As part of our effort to increase our market penetration and to capitalize on
  new opportunities, we plan to continue to expand our sales, marketing and
  customer support capabilities through both our direct sales and marketing staff
  as well as our relationships with distributors. We believe that a physical
  presence in key customer locations provides an important advantage in
  developing and maintaining our new and existing customer relationships.
  
     Extend technology leadership and advance industry standards. A significant
  element of our strategy is to advance industry standards and to extend our
  technology leadership through the development of innovative new technologies.
  We intend to leverage our engineering capabilities to expand the features and
  functionality of broadband products. We will strive to use our technology
  leadership to achieve a significant time-to-market advantage over competing
  broadband access suppliers by offering advanced features, such as IP telephony
  and videoconferencing. In addition, we intend to apply S-CDMA to additional
  applications such as wireless communications and Local Multipoint Distribution
  Systems. We will continue to participate in industry standards organizations
  and activities for DOCSIS, DVB, MPEG and PacketCable.
  
     Provide superior customer service and support. We believe that our ability
  to provide consistent high quality service and support is a key factor in
  attracting and retaining customers. We provide our customers with technical
  support and training through customer support representatives and
  representatives of distributors. We offer service and support to our customers
  24 hours a day, seven days a week.
  
                                         24
  Products
  
     Our current portfolio of products complements our strategy to be the leading
  provider of broadband systems to cable television operators, providers of
  telephone services and other service providers seeking to provide broadband
  access services to residential and commercial users.
  Product Family     Product
       --------------     ---------------------------------------------
  Cable Systems      Terayon S-CDMA Products
  
                          TeraLink 1000 S-CDMA Master Controller
                          TeraLink S-CDMA Gateway
                          TeraPro S-CDMA Cable Modem
                          TeraView Network Management Software
  
                          Terayon DOCSIS Products
  
                          TeraLink 2000 DOCSIS CMTS
                          TeraJet DOCSIS Cable Modem
  
                          Terayon DVB Cable Products
  
                          UCMT-2000 Interactive Network Adaptor
                          UCM-220 Cable Modem
                          HAS-2000 High Availability Server
  
                          Multigate Telephony System
  
       Video Systems      CherryPicker 500
                          CherryPicker 7000
                          CherryPicker 1000
                          CherryPicker AdSplicer
  
       DSL Systems        Miniplex DSL Systems
                          IPTL Converged Voice and Data Services System
                          Highlink
  
       Wireless Products  SatStream--Satellite modem
                          NetStream--Broadband Satellite IP Gateway
                          WebStream--Broadband Satellite IP Gateway
                          HAS-2000--High Availability Server
  Cable Systems
  
     Our TeraComm system enables cable operators to cost-effectively deploy
  reliable two-way broadband access services. The TeraComm system is comprised of
  the TeraPro cable modem, the TeraLink 1000 Master Controller, the TeraLink
  Gateway and the TeraView Element Management and Provisioning Software. The
  price of a TeraComm system is dependent on a number of variables, including a
  customer's basic cable system architecture, the type of routing equipment a
  customer intends to use, the level and quality of service that a cable operator
  desires to provide and the volume of products purchased by a customer.
  
     TeraPro Cable Modem. The TeraPro cable modem is a data communications device
  installed in a subscriber's home or business. The TeraPro cable modem connects
  to the subscriber's PC via a standard 10BaseT Ethernet connector and to the
  cable network via a
  
                                         25
  standard coaxial cable connector. The TeraPro cable modem automatically
  configures itself without user intervention, thus minimizing modem installation
  time. In addition, the configuration software for the TeraPro cable modem is
  downloaded remotely, allowing centralized software upgrades directly from the
  headend management system.
  
     The TeraPro cable modem delivers full two-way communication over the cable
  network, with data rates of up to 14 Mbps per 5 MHz channel in both the
  upstream and the downstream direction. The TeraPro cable modem operates at full
  capacity at an SNR as low as 13dB, and gradually adjusts throughput to provide
  transmission at an SNR as low as -13dB. This feature will permit the TeraPro
  cable modem to operate across any portion of the 5 to 42 MHz upstream RF
  spectrum.
  
     TeraLink 1000 Master Controller. The TeraLink 1000 Master Controller is a
  data channel controller and multiplexer located at the cable headend system or
  distribution hub. The TeraLink 1000 Master Controller provides control,
  management and data transport functions for TeraPro cable modems connected to
  the cable network. It offers dynamic bandwidth management, high speed traffic
  concentration, access control to data networking resources and data service
  quality and integrity.
  
     The TeraLink 1000 Master Controller is a single channel, rack-mountable
  controller that supports up to 2,000 cable modems per channel. Additional
  TeraLink 1000 Master Controllers can be added to scale service as performance
  and subscriber needs grow. The TeraLink 1000 Master Controller, with the
  TeraLink Gateway, provides a 100 BaseT interface for direct connectivity to a
  private backbone or any vendor's router or switch. Alternatively, the TeraLink
  1000 Master Controller, with its built-in ATM OC-3 interface, can be connected
  via an ATM switch, or directly to Cisco's 7500 series routers.
  
     TeraLink Gateway. The TeraLink Gateway is a rack-mountable edge concentrator
  providing end-user clients with broadband access to a remote IP backbone (e.g.,
  Internet) as well as efficient communication between modems. The TeraLink
  Gateway includes an ATM OC-3 interface for connectivity to up to two TeraLink
  1000 Master Controllers or an ATM switch. It also provides a 10/100 BaseT
  Ethernet/Fast Ethernet auto-sense interface to a headend backbone or any IP
  router including the Cisco Universal Broadband Router. The TeraLink Gateway
  also includes a separate 10 BaseT interface, which may be connected to a
  separate management network or the headend network. The TeraLink Gateway
  supports up to 2,000 cable modems per RF channel when connected to a TeraLink
  1000 Master Controller. When used with the TeraLink Gateway, the TeraPro cable
  modems behave as an extension of the TeraLink Gateway, providing maximum
  bandwidth and privacy.
  
     TeraView Element Management and Provisioning Software. The TeraView Element
  Management and Provisioning Software is a Windows 95 and Windows NT standards-
  based software application installed at the headend system or the network
  operations center. The TeraView software allows cable operators to configure,
  control, monitor and maintain multiple channels of the TeraComm system.
  
     Multigate Telephony and Data Access Systems. We produce telephony and data
  access systems for deployment of efficient carrier-class voice services over
  cable. Our systems also provide in-home networking capability for telephony and
  data, based on the Digital Enhanced Cordless Telephony ("DECT") standard. Our
  systems support voice, high-speed data, and Integrated Service Digital Network
  ("ISDN") services for the business telecommuting market and the SOHO market.
  
                                         26
  Video Systems
  
     CherryPicker Digital Video Management Systems. CherryPicker Digital Video
  Management Systems are scalable, open platforms that enable cable, satellite
  and terrestrial operators to deliver customized digital programming. Patented
  statistical re-multiplexing technology gives operators ultimate control over
  programming and allows them to create customized video of programming by
  selecting feeds (grooming) from a vast array of sources. The CherryPicker helps
  operators maximize their available bandwidth while enabling them to provide
  program offerings that target specific local demographics.
  
   DSL Systems
  
     Digital Subscriber Line Systems (xDSL). We produce communications access
  systems based on high-speed IP routing, integrated with telephony. Our
  innovative systems include both central office DSLAMs (Digital Subscriber Line
  Access Multiplexers) and customer premise equipment for SOHO business broadband
  services. These systems deliver high- capacity, symmetric voice and data
  services to the business market, with high density port aggregation at the
  central office site for maximum cost efficiency.
  
   Wireless Products
  
     Our wireless products provide high-speed Internet connectivity to the
  subscriber's PC via a standard digital television services antenna. Our
  SatStream Satellite modem offers residential and commercial subscribers with
  connectivity to the Internet via satellite digital television services.
  
  Customers
  
     We market our products to providers of broadband access services that seek
  to provide broadband access services to both residential and commercial end
  users. Our target market is the largest broadband service providers in each
  major geographic area worldwide.
  
     Our principal customers for cable, DSL and wireless systems include the
  following:
  Cable                                   DSL
       -----                                   ---
  Rogers                                  SBC
       Shaw                                    Bell Atlantic
       TCA Cable TV                            Bell South
         (a subsidiary of Cox Communications)  U.S. West
       Crossbeam                               GTE
         (a subsidiary of Sumitomo)
       UPC
  Digital Video Systems                   Wireless Systems
       ---------------------                   ----------------
  Cox Communications                      Shiron
       Time Warner                             Teleo
       Adelphia                                Gilat Sat
                                               KBI e-Sat
                                               Adaptive
  Four customers accounted for approximately 64% of our revenues for the
  quarter ended March 31, 2000. We believe that a substantial majority of our
  revenues will continue to be derived from sales to a relatively small number of
  customers for the foreseeable future. In addition, we believe that sales to
  these customers will be focused on a small number of projects.
  
                                         27
  Research and Development
  
     We believe that our future success will depend on our ability to enhance our
  existing products and to develop and introduce new products that meet a wide
  range of evolving broadband access service providers and end user needs. In
  addition, to address competitive and pricing pressures, we expect that we will
  have to reduce the unit cost of manufacturing our products through design and
  engineering changes.
  
     We currently are designing and developing a DOCSIS system that includes S-
  CDMA advanced PHY capabilities, which will include a cable modem and an
  accompanying headend controller. These products are in the early stages of
  development and we do not anticipate commercial availability of these products
  until late 2000 or early 2001. We also are developing a common multimedia
  platform for current and advanced transmission of data, voice and video over
  existing broadband infrastructures, including cable, DSL and wireless. These
  products are in the early stages of development, and we do not anticipate
  commercial availability of these products until late 2001.
  
     On March 18, 1999, we entered into a one-year Product Development Assistance
  Agreement ("Development Agreement") with Rogers. Under the terms of the
  Development Agreement, Rogers is obligated to provide assistance with the
  characterization and testing of our subscriber-end and head-end voice-over-
  cable equipment. In addition, Rogers is obligated to provide technology to
  assist us in connection with our efforts to develop high quality, field proven
  technology solutions that are DOCSIS-compliant and PacketCable-compliant.
  
  Sales and Marketing
  
     We have direct sales forces in North America, South America, Europe and
  Asia. We also distribute our products via distributors and systems integrators.
  We have signed a distribution agreement with Sumitomo under which Crossbeam is
  distributing the TeraComm system to several of Japan's leading cable operators.
  In January 2000, we signed a distribution agreement with BARCO Communication
  Systems, for the sale of our CherryPicker systems to cable television operators
  worldwide. In June 2000, we signed a distribution agreement with NEC, for the
  sale of our IPTL DSL access system throughout Asia and Central and South
  America.
  
     We market our products directly to providers of broadband access services
  through our sales force, key distribution and technology partners, as well as
  other marketing vehicles such as industry press, trade shows and the Web.
  Through our marketing efforts, we strive to educate providers on the
  technological and business benefits of our system solution, as well as our
  ability to provide quality support and service to the customer. We participate
  in the major trade shows and industry events for the broadband access industry
  in the United States and we are expanding our presence in other markets through
  joint participation at local events with our international sales and marketing
  partners. Industry referrals and reference accounts are significant marketing
  tools we develop and utilize.
  
  Customer Service and Technical Support
  
     We believe that our ability to provide consistently high quality service and
  support will be a key factor in attracting and retaining customers. Our TSS
  (Technical Services and Support) organization, located in North America,
  Europe, South America and Asia, offers support 24 hours a day, seven days per
  week. Prior to deployment of our systems, each customer's needs
  
                                         28
  are assessed and proactive solutions are implemented, including various levels
  of training, periodic management and coordination meetings, and problem
  escalation procedures. We place a strong emphasis on technical training for our
  customers. Initial training is offered at no cost, both at our headquarters in
  Santa Clara and on our customers' premises.
  
     In addition to our TSS organization, we have developed sophisticated tools
  for remote diagnosis and monitoring of the TeraComm systems deployed by cable
  operators. These tools allow us to monitor cable operators' installations of
  the TeraLink 1000 Master Controller to suggest solutions proactively before
  problems become noticeable to end users. We are developing a Web-based
  knowledge system to provide cable operators with access to the latest technical
  support information.
  
  Manufacturing
  
     We outsource the majority of the materials procurement, printed circuit
  board assembly, and product assembly and testing to turnkey contract
  manufacturers. Currently, we contract with Solectron, located in Milpitas,
  California, and CalComp Electronics, located in Thailand, for the manufacture
  of the majority of our products. In addition, we also manufacture our products
  at subcontractors located in the U.S. and Israel. We have a limited in-house
  manufacturing capability at our Santa Clara headquarters. This facility
  currently is used for the assembly and final testing of TeraLink 1000 Master
  Controllers and TeraLink Gateways. We also use this facility for pilot
  production of new product designs, sample testing of products received from
  volume manufacturers, developing the manufacturing process and documentation
  for new products in preparation for outsourcing. We also perform repair
  operations for some of our products returned from customers with our in-house
  manufacturing resources.
  
     Our future success will depend in significant part on our ability to obtain
  high volume manufacturing at low costs. As volume increases, we plan to engage
  additional contract manufacturers, to procure additional manufacturing
  facilities and equipment, to modify existing inventory procedures, to
  substantially increase our personnel and to revise our quality assurance and
  testing practices.
  
     Subcontractors supply our contract manufacturers with both standard
  components and subassemblies manufactured to our specifications. We depend upon
  certain key suppliers for a number of the components for our products. For
  example, we currently rely on Philips Semiconductor, Inc. (formerly VLSI
  Technology, Inc.) for our S-CDMA ASIC, which is used in our headend and cable
  modem products. In addition, all of our products contain one or more components
  that currently only are available from a single source.
  
  Competition
  
     The market for broadband access systems is extremely competitive and is
  characterized by rapid technological change. Our direct competitors in the
  cable modem arena include Cisco, Com21, Matsushita, Motorola, Nortel, Vyyo,
  RCA, Samsung, Scientific-Atlanta, Sony, 3Com, Toshiba and Zenith, and there are
  many other potential market entrants. We also sell products that compete with
  existing data access and transmission systems utilizing the telecommunications
  networks, such as those of 3Com. Additionally, our controller and headend
  system products face intense competition from well-established companies such
  as Cisco, Nortel and 3Com. Our direct competitors in the DSL arena include ECI
  Telecom, Charles Industries, ADC, Copper Mountain, Accelerated Networks,
  Integral Access and VINA Technologies. Our direct competitors in the video
  arena are Cisco and Harmonic, while our direct competitors in the voice arena
  are Nortel, TelLabs, ADC and Alcatel. Our direct competitors in wireless are
  Hughes, Marconi, NEC and Scientific-Atlanta.
  
                                         29
  The principal competitive factors in the broadband access market include
  product performance, features and reliability, price, size and stability of
  operations, breadth of product line, sales and distribution capability,
  technical support and service, relationships with providers of broadband access
  services, standards compliance, and general industry and economic conditions.
  Some of these factors are outside of our control. The existing conditions in
  the broadband access market could change rapidly and significantly as a result
  of technological changes, and the development and market acceptance of
  alternative technologies could decrease the demand for our products or render
  them obsolete. In addition, these companies and other competitors could
  introduce broadband access products that will be less costly or provide
  superior performance or achieve greater market acceptance than our products.
  
     Many of our current and potential competitors have significantly greater
  financial, technical, marketing, distribution, customer support and other
  resources, as well as greater name recognition and access to customers.
  
     The market for our products may be impacted by the development of other
  technologies that enable the provisioning of broadband access services and the
  deployment of services over other media. Widespread acceptance of other
  technologies or deployment of services over media not supported by our products
  could materially limit acceptance of our broadband access systems. Broadband
  access services supported by our products and technology may fail to gain
  widespread commercial acceptance by providers of broadband access services and
  end users.
  
  Intellectual Property
  
     We rely on a combination of patent, trade secret, copyright and trademark
  laws and contractual restrictions to establish and protect proprietary rights
  in our products. Our pending patent applications may not be granted. Even if
  they are granted, the claims covered by the patents may be reduced from those
  included in our applications. Any patent might be subject to challenge in court
  and, whether or not challenged, might not be broad enough to prevent third
  parties from developing equivalent technologies or products without taking a
  license from us. We have entered into confidentiality and invention assignment
  agreements with our employees, and we enter into non-disclosure agreements with
  some of our suppliers, distributors and appropriate customers so as to limit
  access to and disclosure of our proprietary information. These statutory and
  contractual arrangements may not prove sufficient to prevent misappropriation
  of our technology or to deter independent third-party development of similar
  technologies. In addition, the laws of some foreign countries might not protect
  our products or intellectual property rights to the same extent as do the laws
  of the United States. Protection of our intellectual property might not be
  available in every country in which our products might be manufactured,
  marketed or sold.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
  version of the DOSCIS cable modem specification based in part on our S-CDMA
  technology. In September 1999, CableLabs indicated that it intended to proceed
  with the advanced PHY work on two parallel tracks: one for the development of a
  prototype based on our S-CDMA technology and one for the inclusion of Advanced
  TDMA technology, as proposed by other companies. In February 2000, CableLabs
  further clarified the status of the advanced PHY project regarding a separate
  release that will include TDMA technologies. In addition, CableLabs reiterated
  that it is continuing to work with us on the development of a DOCSIS
  specification that could include our S-CDMA technology. To that end, we have
  indicated to CableLabs that we would contribute some aspects of our S-CDMA
  technology to the DOCSIS intellectual property pool if and when a DOCSIS
  specification is approved that includes our
  
                                         30
  S-CDMA technology. We would contribute our technology pursuant to a license
  agreement with CableLabs that we would execute at that time, and which contains
  the terms that CableLabs has established for the inclusion of any intellectual
  property from any source in the DOCSIS specifications. Under the terms of the
  proposed license agreement, we would grant to CableLabs a royalty-free license
  for those aspects of our S-CDMA technology that are essential for compliance
  with the DOCSIS cable modem standard. So-called "implementation know how" is
  not covered by this license-only those aspects of the technology that are
  essential to implementing a compliant product. CableLabs would have the right
  to extend royalty-free sublicenses to companies that wish to build DOCSIS-
  compatible products. These sublicenses would allow participating companies to
  utilize and incorporate the essential portions of the S-CDMA technology on a
  royalty-free basis for the limited use of making and selling products or
  systems that comply with the DOCSIS cable modem specification Terayon has
  already joined the DOCSIS intellectual property pool and, as a result, we have
  a royalty-free sublicense that allows us to ship DOCSIS-compatible products
  which contain intellectual property submitted by other companies. The scope of
  this license would not extend to the use of the S-CDMA technology in other
  areas; only for products that comply with the DOCSIS specifications. As a
  result, any of our competitors who join or have joined the DOCSIS intellectual
  property pool will have access to some aspects of our technology without being
  required to pay us any royalties or other compensation. If and when we submit
  S-CDMA to the DOCSIS Intellectual Property pool, we are in no way restricted
  from entering into royalty-bearing license agreements with companies that wish
  to use the S-CDMA technology for purposes other than implementing DOCSIS
  compatible products, or that do not wish to enter into the DOCSIS intellectual
  property pool. Further, some of our competitors have been successful in reverse
  engineering the technology of other companies, and the inclusion of S-CDMA in a
  future DOCSIS specification would expose some aspects of our technology to
  those competitors. DOCSIS specifications are available on an open basis once
  they are approved, not only to companies that are members of the DOCSIS IP
  Pool. If a competitor is able to duplicate the functionality and capabilities
  of our technology, we could lose all or some of the time-to-market advantage we
  might otherwise have. Under the terms of the proposed license agreement, if we
  sue certain parties to the proposed license agreement on claims of infringement
  of any copyright or patent right or misappropriation of any trade secret, those
  parties may terminate our license to the patents or copyrights they contributed
  to the DOCSIS intellectual property pool. If a termination like this were to
  occur, we would continue to have access to some aspects of the DOCSIS
  intellectual property pool, but we would not be able to develop products that
  fully comply with the DOCSIS cable modem specification. Also, even if we were
  to be removed from the IP pool, we would not be prevented from developing and
  selling products that fully comply with the DOCSIS specifications, but we would
  not be able to do this with the benefit of a royalty-free license, which would
  increase the cost of our products, assuming we were able to obtain a license
  agreement for the required technology. Because of these terms, we may find it
  difficult to enforce our intellectual property rights against certain
  companies, even in areas that are not directly related to DOCSIS specifications
  and products.
  
     We anticipate that developers of cable modems increasingly will be subject
  to infringement claims as the number of products and competitors in our
  industry segment grows. We have received letters from two individuals claiming
  that our technology infringes patents held by these individuals. We have
  reviewed the allegations made by these individuals and, after consulting with
  our patent counsel, we do not believe that our technology infringes any valid
  claim of these individuals' patents. If the issues are submitted to a court,
  the court could find that our products infringe these patents. In addition,
  these individuals may continue to assert infringement. If we are found to have
  infringed these individuals' patents, we could be subject to substantial
  damages and/or an injunction preventing us from conducting our
  
                                         31
  business. In addition, other third parties may assert infringement claims
  against us in the future. An infringement claim, whether meritorious or not,
  could be time-consuming, result in costly litigation, cause product shipment
  delays or require us to enter into royalty or licensing agreements. These
  royalty or licensing agreements may not be available on terms acceptable to us
  or at all. Litigation also may be necessary to enforce our intellectual
  property rights.
  
     We pursue the registration of our trademarks in the United States and have
  applications pending to register several of our trademarks. However, the laws
  of certain foreign countries might not protect our products or intellectual
  property rights to the same extent as the laws of the United States. This means
  that effective trademark, copyright, trade secret and patent protection might
  not be available in every country in which our products might be manufactured,
  marketed or sold.
  
  Employees
  
     As of May 31, 2000, we had 690 employees, of which 351 were in the research
  and development group, 147 were in marketing, sales and customer support,
  114 were in operations and 78 were in general and administrative functions.
  None of our employees is represented by a union. We believe that our relations
  with our employees are good.
  
  Properties
  
     Our headquarters are located in an approximately 60,000 square foot leased
  facility located in Santa Clara, California. The current lease for the Santa
  Clara facility expires in March 2002. We have sales offices in Atlanta,
  Georgia; Sao Paulo, Brazil; and Brussels, Belgium. In addition, we lease
  approximately 82,000 square feet in Tel Aviv pursuant to an agreement that
  expires in 2005. It is our intention to consolidate the operations of our
  Israeli operations in this space. We believe that our existing facilities are
  adequate to meet our needs for the immediate future and that our future growth
  can be accommodated by leasing additional or alternative space near our current
  facilities.
  
  Legal Proceedings
  
     In September 1999, Imedia, now our subsidiary, was named as a defendant in a
  case alleging that Imedia breached its term sheet agreement with the plaintiffs
  by negotiating with us while a no-shop provision was in place and refusing to
  allowing the plaintiffs to invest in Imedia. The plaintiffs are seeking damages
  in excess of $12.0 million. As part of the terms of the Imedia Agreement and
  Plan of Merger and Reorganization, shares of our common stock to be issued to
  the former shareholders of Imedia were placed in escrow to indemnify us for any
  damages that are directly or indirectly suffered as a result any claim brought
  by any person who was a prospective investor in Imedia and was not a
  securityholder of Imedia on the closing date of the Imedia acquisition. The
  value of the escrowed shares was approximately $10.0 million based on the
  market value of our common stock on the closing date. The case is in its
  initial stages, and no trial date has been established. We have reviewed the
  allegations made by the plaintiffs and we do not believe that the outcome will
  have a negative impact on our financial position, results of operations or cash
  flows.
  
     In April 2000, a lawsuit against us and certain of our officers and
  directors, entitled Birnbaum v. Terayon Communication Systems, Inc., was filed
  in the United States District Court for the Central District of California. The
  venue for the lawsuit has been moved to the Northern District of California.
  The plaintiff purports to be suing on behalf of a class of stockholders who
  purchased or obligated themselves to purchase our securities during the period
  from February 2, 2000 to April 11, 2000. The complaint alleges that the
  defendants
  
                                         32
  violated the federal securities laws by issuing materially false and misleading
  statements and failing to disclose material information regarding our
  technology. Several other lawsuits similar to the Birnbaum suit have since been
  filed. The lawsuits seek an unspecified amount of damages, in addition to other
  forms of relief. We consider the lawsuits to be without merit and we intend to
  defend vigorously against these allegations. However, the litigation could
  prove to be costly and time consuming to defend, and there can be no assurances
  about the eventual outcome.
  
                                         33
  The section entitled Management's Discussion and Analysis of Financial
  Condition and Results of Operations should be deleted and replaced with the
  following section:
  
                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  Overview
  
     We develop, market and sell broadband access systems. Our objective is to be
  the leading provider of broadband access systems to providers of services to
  residential and commercial end users. Since our inception in January 1993, we
  have focused on the development of our patented S-CDMA technology, as well as
  certain other core technologies, to enable broadband transmission of data over
  cable networks. We began the specification and design of our first ASIC in
  October 1994 and produced the first version of this ASIC in September 1996. At
  the same time, we developed an end-to-end broadband access system, the TeraComm
  system, around the ASIC. We commenced volume shipments of our TeraComm system
  in the first quarter of 1998. With some recent acquisitions of complementary
  technology and businesses, in 1999 we also began to turn our attention to
  providers of broadband services using existing telephone, copper wire
  infrastructures and wireless systems.
  
     We sell our products both in North America and internationally, and we
  market our products primarily to cable operators and distributors. Our strategy
  is to supply the leading providers of broadband access services worldwide.
  Consistent with this strategy, our initial target market consisted of the ten
  largest cable companies in each major geographic area. In most markets, a small
  number of large cable operators often provide services to a majority of the
  subscribers in a specific region and thus influence the purchase decisions of
  smaller cable operators. In North America, three of the largest cable
  operators, Rogers Cable Inc. (formerly Rogers Cablesystems Limited), Shaw and
  TCA Cable TV (a subsidiary of Cox Communications, Inc.), are deploying the
  TeraComm system. In Japan, through our partner Sumitomo, we have established
  ourselves as a market leader. In Europe, our TeraComm system is being deployed
  by UPC, one of Europe's largest broadband communications companies. As a result
  of the nature of the cable industry and our strategic focus, a small number of
  customers have accounted for the majority of our revenues to date, and we
  expect that the majority of our revenues will continue to be generated from a
  small number of customers for the foreseeable future. In the three months ended
  March 31, 2000, four customers accounted for approximately 64% of our revenues.
  This compares to approximately 63% of our revenues from three customers in the
  same period in 1999. We anticipate that the timing and maturity of these
  customers' deployments of the TeraComm system will result in variations in
  revenues generated from these customers.
  
     The rapid evolution of broadband has resulted in cable television operators,
  providers of telephone service and other service providers seeking to provide a
  bundle of voice, data and video services to their residential and commercial
  subscribers over existing and new infrastructures. Consistent with our
  objective to be a leading provider of broadband access systems, through a
  series of recent acquisitions, we are building a complete portfolio of
  broadband products to support high-speed delivery of voice, data and video
  services over cable, DSL and wireless. In September 1999, we acquired Imedia
  and the CherryPicker digital video management system. In November 1999, we
  completed our acquisition of Radwiz, a provider of communication access systems
  based on high-speed IP routing integrated with telephony. On January 2, 2000,
  we completed our acquisition of Telegate, a developer and manufacturer of
  telephony and data access platforms that are deployed by service providers to
  deliver efficient carrier-class voice services over cable. In addition, we
  acquired Combox, a manufacturer of broadband data systems and satellite
  communications based on international standards, and certain assets of Internet
  Telecom, a supplier of PacketCable and other standards-based, voice-over IP
  systems and technologies, through our Israeli subsidiary, Telegate. On April
  19, 2000, we acquired Ultracom, a supplier of broadband systems on silicon.
  Finally, on April 22, 2000, we acquired ANE, a producer of DSL systems that
  provide multiple phone lines over existing copper telephony of a single pair of
  copper wires.
  
                                         34
  The intensely competitive nature of the market for broadband access systems
  has resulted in significant price erosion over time. We have experienced and
  expect to continue to experience downward pressure on our unit ASP or average
  selling price. A key component of our strategy is to decrease the cost of
  manufacturing our products to improve our gross margins. For example, in the
  fourth quarter of 1998, we introduced a cable modem using a single-board
  design, which has higher gross margins than our original dual-board design.
  Subsequently, we have successfully introduced several cost reduced versions of
  the single-board modem that have allowed us to continue to improve gross margin
  performance despite ongoing ASP declines. We intend to continue to engage in
  and implement cost reduction efforts, including the further integration of ASIC
  components, other design changes and manufacturing efficiencies.
  
     We sustained a net loss of $28.4 million for the three months ended March
  31, 2000 and $5.9 million in the same period in 1999. We had an accumulated
  deficit of $176.8 million as of March 31, 2000. Our operating expenses are
  based in part on our expectations of future sales, and we expect that a
  significant portion of our expenses will be committed in advance of sales. We
  expect to continue to increase our expenditures in technical development and
  sales and marketing as we engage in activities related to product enhancement,
  cost reduction and increasing market penetration. In addition, we anticipate
  that our expenses will increase as a result of the expenses associated with our
  recent acquisitions, including amortization. We also anticipate that future
  acquisitions will result in increased expense levels. Additionally, we expect
  to increase our capital expenditures and other operating expenses in order to
  support and expand our operations. We anticipate that we will spend
  approximately $17.0 million on capital expenditures and approximately $40.0 to
  $50.0 million on research and development during the 12 months ending March 31,
  2001. Anticipated capital expenditures consist of purchases of additional test
  equipment to support higher levels of production and computer hardware,
  furniture and leasehold improvements for expansion of our facilities,
  implementation of an enterprise resource planning ("ERP") system and software
  and equipment for newly hired employees. As a result of these anticipated
  increased operating expenses, we expect to continue to incur losses for the
  foreseeable future.
  
  Acquisition of Telegate
  
     In October 1999, we entered into a Share Purchase Agreement to acquire
  Telegate, an Israeli company. Telegate produces telephony and data access
  platforms that are deployed by service providers to deliver efficient carrier-
  class voice services over cable. Telegate also provides in-home networking
  capability for telephony and data, based on the Digital Enhanced Cordless
  Telephony (DECT) standard. The transaction was completed on January 2, 2000.
  The acquisition was accounted for under the purchase method of accounting and,
  accordingly, our Report on Form 10-Q dated May 15, 2000 presents our financial
  results through the entire period and combined results with Telegate for the
  portion of the period following January 2, 2000.
  
  Recent Events
  
     Subsequent to March 31, 2000, we completed our acquisitions of ANE, Combox,
  Internet Telecom and Ultracom. The Unaudited Pro Forma Combined Condensed
  Financial Statements included elsewhere in this document reflect the impact of
  the ANE and Combox acquisitions. The Unaudited Pro Forma Combined Condensed
  Financial Statements do not include the
  
                                         35
  impact of the Internet Telecom and Ultracom acquisitions. The purchase price
  for Internet Telecom and Ultracom is estimated at approximately $94 million. We
  believe that a significant portion of the purchase price will be allocated to
  intangible assets, including goodwill. The intangible assets will be amortized
  over lives expected to range from two to five years.
  
     In April 2000, we acquired certain assets and assumed certain liabilities of
  ANE, which produces DSL systems that provide multiple phone lines over the
  existing copper telephony network. We issued 1,404,552 shares of common stock,
  valued at approximately $85.0 million based on the maximum purchase price
  specified in the asset purchase agreement. We also established an employee
  retention program for purposes of retaining certain identified employees of
  ANE. The retention program provides for up to three annual payments to the
  identified employees in a total amount of approximately $4.2 million provided
  the employees remain employed by us. The retention payments will be charged to
  expense over the employees' respective periods of service. We will account for
  the acquisition as a purchase transaction.
  
     In April 2000, we also acquired Combox, an Israeli manufacturer of broadband
  data systems and satellite communications based on international standards.
  Combox's cable data access systems conform to the growing EuroModem
  international specification, based on the Digital Video Broadcasting (DVB)
  standard. We issued 1,547,770 shares of common stock valued at approximately
  $92.0 million based on the fair market value of our common stock on the days
  immediately preceding and following the date the acquisition was announced. In
  addition, we issued options to purchase our common stock to the vested and
  unvested optionholders of Combox options. We will account for the acquisition
  as a purchase transaction.
  
     In April 2000, our subsidiary Telegate purchased certain assets of Internet
  Telecom, an Israeli-based supplier of PacketCable and other standards-based,
  voice-over-IP systems and technologies. We issued 377,380 shares of common
  stock valued at approximately $44.0 million based on the fair market value of
  our common stock on the days immediately preceding and following the
  announcement of the acquisition and paid the former shareholders of Internet
  Telecom approximately $1.5 million. We will account for the transaction as a
  purchase transaction.
  
     In April 2000, we acquired Ultracom, an Israeli-based supplier of broadband
  systems-on-silicon. We issued 536,766 shares of common stock valued at
  approximately $50.0 million based on the fair market value of the our common
  stock on the days immediately preceding and following the date the acquisition
  was announced. We assumed the unvested Ultracom options, the value of which
  will be included in the purchase price. We will account for the transaction as
  a purchase transaction.
  
  Results of Operations
  
   Three Months Ended March 31, 2000 and 1999
  
     Revenues.  Revenues consist primarily of sales of broadband access systems
  consisting of cable modems and headend equipment to new and existing customers.
  Our revenues increased to $59.3 million for the three months ended March 31,
  2000 from $15.9 million for the same period in 1999. The increased revenues in
  the first three months of 2000, as compared to the same quarter in 1999, were
  largely attributable to continuing deployment of our TeraComm system by
  existing customers. The sales of products acquired as a result of our
  acquisition of Imedia, Radwiz and Telegate accounted for approximately $8.8
  million of the increased revenue in the first quarter of 2000.
  
                                         36
  We sell our products directly to broadband access service providers, system
  resellers and distributors. Revenues related to product sales are generally
  recognized when the products are shipped to the customer, the point at which
  title passes. A provision is made for estimated product returns as product
  shipments are made. Our existing agreements with our system resellers and
  distributors do not contain price protection provisions and do not grant return
  rights beyond those provided by our standard warranty.
  
     Cost of Goods Sold. Cost of goods sold consists of direct product costs as
  well as the cost of our manufacturing operations group. The cost of the
  manufacturing operations group includes assembly, test and quality assurance
  for products, warranty costs and associated costs of personnel and equipment.
  For the three months ended March 31, 2000, we incurred cost of goods sold of
  $43.9 million compared to $14.0 million for same period in 1999. Cost of goods
  sold for the three months ended March 31, 2000 included the cost of our
  manufacturing operations group and approximately $6.3 million of amortization
  of intangibles assets resulting from the acquisitions of Imedia, Radwiz and
  Telegate. Our cost of goods sold increased during the three months ended March
  31, 2000, compared to the same period in 1999 primarily due to increased
  product shipments.
  
     Gross Profit. We achieved a gross profit of $15.4 million for the three
  months ended March 31, 2000 compared to $1.9 million for the same period in
  1999. This improvement in our gross profit was largely the result of continued
  cost reduction efforts. We intend to continue to engage in and implement cost
  reduction efforts, including the further integration of ASIC components, other
  design changes and manufacturing efficiencies. We anticipate that continued
  decreases in the average sales price of our products will partially, if not
  completely, offset the benefits obtained from further cost reductions.
  
     Our gross profit also is influenced by the sales mix of TeraLink Master
  Controllers, TeraLink Gateways and TeraPro cable modems and the maturity of
  TeraComm system deployments in any quarter. TeraPro cable modems have lower
  margins than the TeraLink Master Controllers and TeraLink Gateway headend
  products. New deployments of TeraComm systems typically include a higher mix of
  headend equipment and involve smaller quantities of product sold. Products sold
  in connection with new deployments thus generally are sold at higher margins
  than products associated with more mature deployments of the TeraComm system,
  which generally involve larger quantities of products, primarily cable modems.
  We expect that the introduction of new customers and the relationship of
  revenues generated from the sale of TeraPro cable modems to our overall
  revenues will result in fluctuations in our gross profit in future periods.
  
     We introduced a CableLabs certified DOSCIS 1.0 cable modem in third quarter
  of 1999. We also are currently developing a DOCSIS system that will include a
  headend controller. We believe that the widespread adoption of industry
  standards will result in further price pressure. We anticipate that the
  relationship of revenues generated from the sale of our proprietary TeraComm
  system versus a DOCSIS compliant system will result in fluctuations in our
  gross profit in future periods. The impact on our gross profit for the three
  months ended March 31, 2000 resulting from the sale of our DOCSIS 1.0 cable
  modem was not significant.
  
                                         37
  Our gross profit also is influenced by the level of sales of products of
  acquired companies, which produce varying gross profit results. We expect that
  our gross profit will fluctuate in future periods as a result of these and
  other acquisitions.
  
     Research and Development. Research and development expenses consist
  primarily of personnel costs, as well as design expenditures, equipment and
  supplies required to develop and to enhance our products. Research and
  development expenses increased to $10.6 million for the three months ended
  March 31, 2000 from $3.2 million in the same period of 1999, primarily as a
  result of increased personnel costs. The increased personnel costs were a
  result of expansion in our own employee base as we continued to focus our
  efforts on developing new products and enhancing our current products. The
  increased personnel costs were also the result of the acquisitions of Imedia,
  Radwiz and Telegate. We intend to continue to increase investment in research
  and development as a result of these and other activities.
  
     Cost of Product Development Assistance Agreement. In March 1999, we entered
  into a one-year Product Development Assistance Agreement with Rogers. Under the
  terms of the Development Agreement, Rogers is obligated to assist us with the
  characterization and testing of our subscriber-end and head-end voice-over-
  cable equipment. In addition, Rogers is obligated to provide us with technology
  to assist us with our efforts to develop high quality, field proven technology
  solutions that are DOCSIS-compliant and PacketCable-compliant. The Development
  Agreement has a term of one year. In consideration of Rogers entering into the
  Development Agreement, we issued Rogers two fully vested and non-forfeitable
  warrants, each to purchase two million shares of common stock on a cashless
  basis. One warrant had an exercise price of $0.50 per share and one warrant had
  an exercise price of $18.50 per share. The fair value of the two warrants was
  approximately $45.0 million and resulted in a noncash charge included in
  operations over the one-year term of the Development Agreement. As a result of
  the Development Agreement, our results for the three months ended March 31,
  2000 include a noncash charge of $9.6 million compared to $1.6 million for the
  same period in 1999. In March 2000, Rogers purchased 3,687,618 shares of our
  common stock on a net exercise basis, resulting in no proceeds to us.
  
     Sales and Marketing. Sales and marketing expenses consist primarily of
  salaries and commissions for sales, marketing and support personnel, and costs
  related to trade shows, consulting and travel. Sales and marketing expenses
  increased to $7.7 million for the three months ended March 31, 2000 from $2.8
  million for the same period in 1999. The increase in sales and marketing
  expenses was primarily due to increased payroll costs related to additional
  sales and support personnel necessary to support the expansion of our customer
  base. In addition, the increase in sales and marketing expenses was
  attributable to the increased payroll and associated costs resulting from the
  acquisitions of Imedia, Radwiz and Telegate, and increased commissions related
  to higher sales. We expect sales and marketing expenses to continue to increase
  as we expand our customer base.
  
     General and Administrative. General and administrative expenses primarily
  consist of salary and benefits for administrative officers and support
  personnel, travel expenses, legal, accounting and consulting fees. General and
  administrative expenses increased to $4.2 million for the three months ended
  March 31, 2000 from $1.2 million in the same period of 1999. The increase was
  primarily due to costs associated with the increased infrastructure required to
  support our expanded activities and increased personnel costs associated with
  our acquisitions of Imedia, Radwiz and Telegate. We expect general and
  administrative expenses will continue to increase in the near term as a result
  of these factors.
  
     In-Process Research and Development. We incurred charges of $6.8 million for
  the three months ended March 31, 2000 related to research and development
  projects in process at
  
                                         38
  Telegate at the time of the acquisition. The projects identified as in-process
  will require additional effort in order to establish technological feasibility.
  These projects have identifiable technological risk factors that indicate that
  even though successful completion is expected, it is not assured.
  
     In-process technology acquired consists primarily of major additions to
  Telegate's core technology, which is related to Telegate's planned development
  of new features. The majority of the intended functionality of these new
  features is not supported by Telegate's current technology. Intended new
  features include: connection on demand functionality to extend the product's
  ISDN compatibility; the ability to use cordless technology for either voice or
  data applications; and, a subscriber end unit that can be used in multi-
  dwelling units. Notwithstanding our expectations, there remain significant
  technical challenges that must be resolved in order to complete the in-process
  technology.
  
     Goodwill Amortization. The Imedia acquisition was completed on September 16,
  1999 and was accounted for as a purchase transaction. The total purchase price,
  representing the fair value of our shares issued and transaction and direct
  acquisition costs, was approximately $109.0 million. The purchase price was
  allocated between the net tangible assets of Imedia on the date of acquisition
  (approximately $645,000), in-process research and development (approximately
  $11.0 million) and intangible assets acquired (approximately $97.3 million).
  Intangible assets consist of developed technology (approximately $27.0
  million), assembled workforce (approximately $2.5 million), trademark
  (approximately $4.0 million) and goodwill (approximately $63.8 million). The
  intangible assets will be amortized straight line over lives ranging from two
  to six years. The amortization of developed technology will impact cost of
  goods sold in future periods. The amortization of the other intangibles will
  principally impact operating expenses in future periods.
  
     The Radwiz acquisition was completed on November 22, 1999 and was accounted
  for as a purchase transaction. The total purchase price, representing the fair
  value of our shares issued and transaction and direct acquisition costs, was
  approximately $53.6 million. The purchase price was allocated between the net
  tangible assets of Radwiz on the date of acquisition (approximately $3.1
  million), in-process research and development (approximately $3.6 million) and
  net intangible assets acquired (approximately $46.9 million). Intangible assets
  consist of developed technology (approximately $29.9 million), assembled
  workforce (approximately $2.8 million), trademark (approximately $1.1 million)
  and goodwill (approximately $24.1 million). Goodwill has been increased and
  deferred tax liabilities have been recorded in the amount of approximately
  $11.0 million to reflect the net tax effect of the book/tax basis differences
  in the acquired intangibles, excluding goodwill and in-process research and
  development. The intangible assets will be amortized straight line over lives
  ranging from two to six years. The amortization of developed technology will
  impact cost of goods sold in future periods. The amortization of the other
  intangibles will principally impact operating expenses in future periods.
  
     The Telegate acquisition was completed on January 2, 1999 and was accounted
  for as a purchase transaction. The total purchase price, representing the fair
  value of our shares issued and transaction and direct acquisition costs, was
  approximately $140.0 million. The purchase price was allocated between the net
  tangible assets of Telegate on the date of acquisition (approximately $6.9
  million), in-process research and development (approximately $6.8 million) and
  intangible assets acquired (approximately $126.3 million). Intangible assets
  consist of developed technology (approximately $21.1 million), customer
  relationship
  
                                         39
  (approximately $34.6 million) assembled workforce (approximately $4.2 million),
  and goodwill (approximately $66.6 million). Goodwill has been increased and
  deferred tax liabilities have been recorded in the amount of approximately
  $167,000 to reflect the net tax effect of the book/tax basis differences in the
  acquired intangibles, excluding goodwill and in-process research and
  development. Deferred tax assets have been realized based on the projected
  reversal of taxable temporary differences and have been netted against deferred
  tax liabilities for purposes of allocating the purchase price. The intangible
  assets will be amortized straight line over lives expected to range from two to
  six years. The amortization of developed technology and customer relationship
  will impact cost of goods sold in future periods. The amortization of the other
  intangibles will principally impact operating expenses in future periods.
  
     We expect amortization of goodwill and other intangibles related to
  acquisitions subsequent to March 31, 2000, to increase in future periods.
  
     Net Interest Income (Expense). Net interest income was $1.4 million for the
  three months ended March 31, 2000 compared to $1.0 million for the same period
  in 1999.
  
     Income Taxes. We have generated operating losses since our inception. Due to
  our inability to recognize a benefit from these operating losses we have no
  provision for income taxes in 1999 and 1998. We account for income taxes under
  Statement of Financial Accounting Standards No. 109, Accounting for Income
  Taxes ("FAS 109"). Under FAS No. 109, deferred tax assets and liabilities are
  determined based on the difference between financial reporting and tax bases of
  assets and liabilities, and are measured using the enacted tax rates and laws
  that will be in effect when the differences are expected to reverse. FAS 109
  provides for the recognition of deferred tax assets if realization of such
  assets is more likely than not. Based upon the weight of available evidence,
  which includes our historical operating performance and the reported cumulative
  net losses for the prior three years, we have provided a full valuation against
  our net deferred tax assets as of March 31, 2000 and 1999.
  
  Results of Operations
  
   Years Ended December 31, 1999 and 1998
  
     Revenues. Our revenues increased to $97.0 million in 1999 from $31.7 million
  in 1998. Revenues consist primarily of sales of cable modems and headend
  equipment to new and existing customers. The increased revenues in 1999 were
  primarily attributable to the addition of new customers in 1999 and continuing
  deployments of our TeraComm system by existing customers, and, to a lesser
  extent, the sales of products acquired as a result of our acquisition of
  Imedia. The impact on revenues resulting from the acquisition of Radwiz was not
  significant for the year ended December 31, 1999.
  
     We sell our products directly to broadband access service providers, system
  resellers and distributors. Revenues related to product sales are generally
  recognized when the products are shipped to the customer. A provision is made
  for estimated product returns as product shipments are made. Our existing
  agreements with our system resellers and distributors do not contain price
  protection provisions and do not grant return rights beyond those provided by
  the Company's standard warranty.
  
     Cost of Goods Sold. Cost of goods sold consists of direct product costs as
  well as the cost of our manufacturing operations group. The cost of the
  manufacturing operations group includes assembly, test and quality assurance
  for products, warranty costs and associated costs of personnel and equipment.
  In 1999, we incurred $72.0 million in cost of goods sold,
  
                                         40
  which included the cost of our manufacturing operations group and approximately
  $1.9 million of amortization of intangibles assets resulting from the
  acquisitions of Imedia and Radwiz. In 1998, we incurred $34.5 million in cost
  of goods sold, which included the cost our manufacturing operations group and a
  charge of $1.3 million relating to the write-off of obsolete inventory and the
  transition of manufacturing operations.
  
     Gross Profit (Loss). Our gross profit was $25.0 million or 26% of revenue in
  1999. This compares to a gross loss of $2.8 million in 1998. The improvement in
  our gross profit in 1999 compared to 1998 was due largely to the introduction
  of a cable modem using a single-board design in the fourth quarter of 1998.
  This modem has a higher gross margin than our original dual board design.
  Subsequent to the introduction of the single-board design, we have successfully
  introduced cost reduced versions that have allowed us to continue to improve
  gross margin. We intend to continue to engage in and implement cost reduction
  efforts, including the further integration of ASIC components, other design
  changes and manufacturing efficiencies. We anticipate that continued decreases
  in the average sales price of our products will partially, if not completely,
  offset the benefits obtained from further cost reductions.
  
     Our gross profit also is influenced by the sales mix of TeraLink Master
  Controllers, TeraLink Gateways and TeraPro cable modems and the maturity of
  TeraComm system deployments in any quarter.  TeraPro cable modems have lower
  margins than the TeraLink Master Controllers and TeraLink Gateway headend
  products. New deployments of TeraComm systems typically include a higher mix of
  headend equipment and involve smaller quantities of product sold. Products sold
  in connection with new deployments thus generally are sold at higher margins
  than products associated with more mature deployments of the TeraComm system,
  which generally involve larger quantities of products, primarily cable modems.
  We expect that the introduction of new customers and the relationship of
  revenues generated from the sale of TeraPro cable modems to our overall revenue
  will result in fluctuations in our gross profit in future periods.
  
     We introduced a CableLabs certified DOSCIS 1.0 cable modem to the market in
  third quarter of 1999. We also are currently developing a DOCSIS system that
  will include a headend controller. We believe that the widespread adoption of
  industry standards will result in further price pressure. We anticipate that
  the relationship of revenues generated from the sale of our proprietary
  TeraComm system versus a DOCSIS compliant system will result in fluctuations in
  our gross profit in future periods. The impact on our gross margin in 1999
  resulting from the sale of our DOCSIS 1.0 cable modem was not significant.
  
     Our gross margin also is influenced by the level of sales of products of
  acquired companies, which produce varying gross margin results. We expect that
  our gross margin will fluctuate in future periods as a result of these and
  other acquisitions.
  
     Research and Development. Research and development expenses consist
  primarily of personnel costs, as well as design expenditures, equipment and
  supplies required to develop and to enhance our products. Research and
  development expenses increased to $17.6 million in 1999 from $10.7 million in
  1998, primarily as a result of increased personnel costs. The increased
  personnel costs are a result of expansion in our own employee base as we
  continue to focus our efforts on developing new products and enhancing our
  current products. The increased personnel costs are also the result of the
  acquisitions of Imedia and Radwiz. We intend to continue to increase investment
  in research and development as a result of these and other activities.
  
                                         41
  Cost of Product Development Assistance Agreement. In March 1999, we entered
  into a one-year Product Development Assistance Agreement with Rogers. Under the
  terms of the Development Agreement, Rogers is obligated to assist us with the
  characterization and testing of our subscriber-end and head-end voice-over-
  cable equipment. In addition, Rogers is obligated to provide us with technology
  to assist us with our efforts to develop high quality, field proven technology
  solutions that are DOCSIS-compliant and PacketCable-compliant. The Development
  Agreement has a term of one year. In consideration of Rogers entering into the
  Development Agreement, we issued Rogers two fully vested and non-forfeitable
  warrants, each to purchase 2.0 million shares of common stock on a cashless
  basis. One warrant has an exercise price of $0.50 per share and one warrant had
  an exercise price of $18.50 per share. The warrants may be exercised at any
  time in full or in part through March 31, 2000. The fair value of the two
  warrants was approximately $45.0 million and resulted in a noncash charge
  included in operations over the one-year term of the Development Agreement. As
  a result of the Development Agreement, our results for 1999 include a noncash
  charge of $35.1 million. In March 2000, Rogers purchased 3,687,618 shares of
  our common stock on a net exercise basis, resulting in no proceeds to us.
  
     In-Process Research and Development. We incurred charges of $11.0 million
  for the year ended December 31, 1999 related to research and development
  projects in process at Imedia at the time of the acquisition and $3.6 million
  related to research and development project in process at Radwiz at the time of
  the acquisition. The projects identified as in-process will require additional
  effort in order to establish technological feasibility. These projects have
  identifiable technological risk factors that indicate that even though
  successful completion is expected, it is not assured.
  
     In-process technology resulting from the acquisition of Imedia consists
  primarily of major additions to Imedia's core technology, which is related to
  Imedia's planned development of new features. The majority of the intended
  functionality of these new features is not supported by Imedia's current
  technology. Intended new features include offering high quality video service
  over the Internet and multiplexing data with video. We expect that in-process
  technology will be successfully developed and that initial benefits from these
  projects will begin in 2001. However, there remain significant technical
  challenges that must be resolved in order to complete the in-process
  technology.
  
     In-process technology resulting from the acquisition of Radwiz consists
  primarily of major additions to Radwiz's core technology, which is related to
  Radwiz's planned development of new features. The majority of the intended
  functionality of these new features is not supported by Radwiz's current
  technology. Intended new features include offering: end-to-end carrier quality
  of service; allowing access via an ATM network; and, providing ISDN line
  functionality. We expect that in-process technology will be successfully
  developed and that initial benefits from these projects will begin in mid-year
  2000. However, significant technical challenges must be resolved in order to
  complete the in-process technology.
  
     Sales and Marketing. Sales and marketing expenses consist primarily of
  salaries and commissions for sales, marketing and support personnel, and costs
  related to trade shows, consulting and travel. Sales and marketing expenses
  increased to $15.7 million in 1999 from $6.9 million in 1998, primarily due to
  increased payroll costs related to additional sales and support personnel
  necessary to support the expansion of our customer base and resulting from the
  acquisitions of Imedia and Radwiz, and increased commissions related to higher
  sales. We expect sales and marketing expenses to continue to increase as we
  expand our customer base.
  
                                         42
  General and Administrative. General and administrative expenses primarily
  consist of salary and benefits for administrative officers and support
  personnel, travel expenses, legal, accounting and consulting fees. General and
  administrative expenses increased to $7.5 million in 1999 from $3.2 million in
  1998. The increase was primarily a result of costs associated with the
  increased infrastructure required to support our expanded activities and due to
  increased personnel costs associated with our acquisitions of Imedia and
  Radwiz. We expect that general and administrative expenses will continue to
  increase in the near term as a result of these factors.
  
     Amortization of Goodwill and Other Intangible Assets. The Imedia acquisition
  was completed on September 16, 1999 and was accounted for as a purchase
  transaction. The total purchase price, representing the fair value of our
  shares issued and transaction and direct acquisition costs, was approximately
  $109.0 million. The purchase price was allocated between the net tangible
  assets of Imedia on the date of acquisition (approximately $645,000), in-
  process research and development (approximately $11.0 million) and intangible
  assets acquired (approximately $97.3 million). Intangible assets consist of
  developed technology (approximately $27.0 million), assembled workforce
  (approximately $2.5 million), trademark (approximately $4.0 million) and
  goodwill (approximately $63.8 million). The intangible assets will be amortized
  straight line over lives ranging from two to six years. The amortization of
  developed technology will impact cost of goods sold in future periods. The
  amortization of the other intangibles will principally impact operating
  expenses in future periods.
  
     The Radwiz acquisition was completed on November 22, 1999 and was accounted
  for as a purchase transaction. The total purchase price, representing the fair
  value of our shares issued and transaction and direct acquisition costs, was
  approximately $53.6 million. The purchase price was allocated (based on an
  independent appraisal) between the net tangible assets of Imedia on the date of
  acquisition (approximately $3.1 million), in-process research and development
  (approximately $3.6 million) and net intangible assets acquired (approximately
  $46.9 million). Intangible assets consist of developed technology
  (approximately $29.9 million), assembled workforce (approximately $2.8
  million), trademark (approximately $1.1 million) and goodwill (approximately
  $24.1 million). Goodwill has been increased and deferred tax liabilities have
  been recorded in the amount of approximately $11.0 million to reflect the net
  tax effect of the book/tax basis differences in the acquired intangibles,
  excluding goodwill and in-process research and development. Deferred tax assets
  have been realized based on the projected reversal of taxable temporary
  differences and have been netted against deferred tax liabilities for purposes
  of allocating the purchase price. The intangible assets will be amortized
  straight line over lives ranging from two to six years. The amortization of
  developed technology will impact cost of goods sold in future periods. The
  amortization of the other intangibles will principally impact operating
  expenses in future periods.
  
     We expect amortization of goodwill and other intangibles related to the
  acquisitions of Imedia and Radwiz, as well as subsequent acquisitions, to
  increase in future periods.
  
     Net Interest Income. Net interest income increased to $5.0 million in 1999
  from $449,000 in 1998, primarily as a result of higher average cash balances
  subsequent to our public offering in January 1999.
  
     Series F Convertible Preferred Stock Dividend. We recorded a dividend of
  $23.9 million in 1998. The dividend represented the fair value of a warrant to
  purchase 6,000,000 shares of our common stock (the "Shaw Warrant"), and was
  recorded under the provision of EITF No. 96-13, "Accounting for Derivative
  Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
  Stock." The warrant was issued in connection with the sale of $5.0 million of
  convertible preferred stock to Shaw. Shaw purchased 3,000,000 shares of common
  stock in
  
                                         43
  March 1999 and 3,000,000 shares of our common stock in November 1999 under the
  terms of the Shaw Warrant resulting in net proceeds to us of $19.5 million.
  
     Income Taxes. We have generated operating losses since our inception. Due to
  our inability to recognize a benefit from these operating losses we have no
  provision for income taxes in 1999 and 1998, We account for income taxes under
  FAS 109. Under FAS 109, deferred tax assets and liabilities are determined
  based on the difference between financial reporting and tax bases of assets and
  liabilities, and are measured using the enacted tax rates and laws that will be
  in effect when the differences are expected to reverse. FAS 109 provides for
  the recognition of deferred tax assets if realization of such assets is more
  likely than not. Based upon the weight of available evidence, which includes
  the Company's historical operating performance and the reported cumulative net
  losses for the prior three years, the Company has provided a full valuation
  against its net deferred tax assets as of December 31, 1999 and 1998. We intend
  to evaluate our ability to realize the benefit of the deferred tax assets on a
  quarterly basis. See Note 12 to the Consolidated Financial Statements for the
  year ended December 31,1999.
  
     Stock-Based Compensation. As of December 31, 1999, we had recorded deferred
  compensation of $2.6 million related to certain stock options granted in 1998
  and 1997. We amortized approximately $631,000 of the deferred compensation in
  1999, $421,000 in 1998 and $12,000 in 1997. The remainder will be amortized
  over the related vesting period of the stock options. See Note 11 of Notes to
  Consolidated Financial Statements for the year ended December 31, 1999.
  
   Years Ended December 31, 1998 and 1997
  
     Revenues. Our revenues increased to $31.7 million in 1998 from $2.1 million
  in 1997. Revenues consist primarily of sales of cable modems and headend
  equipment to new and existing customers. We did not commence selling our
  products until June 1997 and did not commence selling our products in volume
  until the first quarter of 1998.
  
     Cost of Goods Sold. In 1998, we incurred $34.5 million in cost of goods
  sold, which included the costs our manufacturing operations group and a charge
  of $1.3 million relating to the write-off of obsolete inventory and the
  transition of manufacturing operations. In 1997, we incurred $6.5 million in
  cost of goods sold, which included the cost of the manufacturing group for the
  entire period as we readied our products for commercialization.
  
     Gross Loss. We incurred a gross loss of $2.8 million in 1998. In 1997, we
  incurred a gross loss of $4.3 million due to costs associated with our
  manufacturing operations group. The decrease in gross loss in 1998 compared to
  1997 was primarily due to a reduced negative margin on cable modems, which was
  partially offset by the $1.3 million write-off relating to obsolete inventory
  and the transition of manufacturing operations to Solectron. We completed the
  transition to a lower cost, single-board modem product in the fourth quarter of
  1998. Primarily as a result of this lower cost product, we achieved a positive
  gross margin of $425,000 in the fourth quarter of 1998.
  
     Research and Development. Research and development expenses decreased to
  $10.7 million in 1998 from $11.3 million in 1997 as a result of the timing of
  our development projects.
  
     Sales and Marketing. Sales and marketing expenses increased to $6.9 million
  in 1998 from $4.5 million in 1997, primarily due to increased payroll costs
  related to additional sales
  
                                         44
  and support personnel for commercial trials and deployment of our products and
  increased commissions related to higher sales in 1998.
  
     General and Administrative. General and administrative expenses increased to
  $3.2 million in 1998 from $2.5 million in 1997, primarily a result of the
  additional reporting requirements imposed on us as a public company and
  increased infrastructure to support our expanded activities.
  
     Net Interest Income. Net interest income increased to $449,000 in 1998 from
  $128,000 in 1997, primarily as a result of higher average cash balances
  subsequent to our initial public offering in August 1998.
  
     Series F Convertible Preferred Stock Dividend. We recorded a dividend of
  $23.9 million in 1998. The dividend represents the fair value the Shaw Warrant.
  The Shaw Warrant was issued in connection with the sale of $5.0 million of
  convertible preferred stock to Shaw (the "Shaw Financing"). Our accounting
  conclusion was that the sale of preferred stock was, in substance, a financing
  transaction and not the issuance of equity instruments in exchange for goods or
  services.
  
     Income Taxes. We have not generated operating losses since inception. Due to
  our inability to recognize a benefit from these operating losses we have no
  provision for income taxes in 1998 and 1997. We account for income taxes under
  Statement of Financial Accounting Standards No. 109. Realization of deferred
  tax assets is dependent on future earnings, if any, the timing and amount of
  which are uncertain. Accordingly, valuation allowances in amounts equal to the
  net deferred tax assets as of December 31, 1998 and 1997 have been established
  to reflect these uncertainties.
  
     Stock-Based Compensation. As of December 31, 1998, we had recorded deferred
  compensation of $2.6 million related to certain stock options granted in 1998
  and 1997. We amortized approximately $421,000 of the deferred compensation in
  1998 and $12,000 in 1997. The remainder will be amortized over the related
  vesting period of the stock options. See Note 10 of Notes to Consolidated
  Financial Statements for the year ended December 31, 1999.
  
   Liquidity and Capital Resources
  
     At March 31, 2000, we had approximately $54.7 million in cash and cash
  equivalents, $63.2 million in short-term investments and a $2.5 million
  revolving line of credit. There were no outstanding borrowings under the line
  of credit and approximately $2.5 million was available.
  
     Cash provided by operating activities in the first three months of 2000 was
  $5.8 million. This compares to cash used in operating activities of $3.7
  million in the first three months of 1999. Cash provided by investing
  activities was $13.2 million in the first three months of 2000 compared to cash
  used in investing activities of $55.5 million in the first three months of
  1999. Investment activities consisted primarily of the purchase and sale of
  short-term investments in 2000 and 1999. Cash provided by financing activities
  was $3.2 million for the three months ended March 31, 2000 compared to $85.6
  million for the three months ended March 31, 1999. Financing activities
  consisted primarily of proceeds from the exercise of options and the issuance
  of common stock in 2000 and from the sale and issuance of common stock in a
  public offering in 1999.
  
     As of March 31, 2000, we had approximately $125.7 million of unconditional
  purchase obligations. We anticipate that we will pay approximately $69.1
  million of these obligations by June 30, 2000. We intend to make these payments
  out of available working capital.
  
                                         45
  We believe that our current cash and cash equivalent balances, together with
  cash anticipated to be generated from operations and anticipated financing
  arrangements, including this offering, will satisfy our projected working
  capital and capital expenditure requirements, at a minimum, for the next twelve
  months.
  
   Impact of Year 2000
  
     In prior years, we discussed the nature and progress of our plans to become
  year 2000 ready. In late 1999, we completed the remediation and testing of our
  systems. As a result of those planning and implementation efforts, we
  experienced no significant disruptions in mission critical information
  technology and non-information technology systems and we believe those systems
  successfully responded to the year 2000 date change. We incurred no significant
  costs in 1999 in connection with the remediation of our systems. We are not
  aware of any material problems resulting from year 2000 issues, either with our
  products, our internal systems, or the products and services of third parties.
  We will continue to monitor our mission critical computer applications and
  those of our suppliers and vendors throughout the rest of the year to ensure
  that any latent year 2000 matters that may arise are addressed promptly.
  
   Recent Financial Accounting Pronouncement
  
     In September 1998, the Financial Accounting Standards Board issued Statement
  of Financial Accounting Standards No. 133, "Accounting for Derivative
  Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a
  comprehensive and consistent standard for the recognition and measurement of
  derivatives and hedging activities. FAS 133 was effective for fiscal years
  beginning after September 15, 1999. In July 1999, the Financial Accounting
  Standards Board issued Statement of Financial Accounting Standards No. 137,
  "Accounting for Derivative Instruments and Hedging Activities--Deferral of the
  Effective Date of FASB Statement No. 133" (FAS 137). FAS 137 defers for one
  year the effective date of FAS 133 which will now apply to all fiscal quarters
  of all fiscal years beginning after June 15, 2000. We believe that the adoption
  of FAS 133 will not have a significant impact on our operating results or cash
  flows.
  
     In December 1999, the Securities and Exchange Commission issued Staff
  Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
  ("SAB 101"). SAB 101 provides guidance on the recognition, presentation and
  disclosure of revenue in the financial statements of public companies. The
  accounting profession is currently exploring practical means of implementing
  the guidelines established by SAB 101. To the extent that SAB 101 is applicable
  to us, we will be required to change our revenue recognition policy. In June
  2000 the Securities and Exchange Commission issued SAB 101 B which delays the
  effective date of SAB 101 until no later than the fourth fiscal quarter
  beginning after December 15, 1999. We will be required to adopt SAB 101 by the
  fourth quarter of 2000. Financial information for prior quarters would be
  restated with the cumulative effect adjustment reflected in the first quarter
  of 2000 in accordance with FASB Statement No. 3, Reporting Accounting Changes
  in Interim Financial Statements. In subsequent periods, we would disclose the
  amount of revenue, if material, recognized in those periods that were included
  in the cumulative effect adjustment. We currently cannot determine what effect,
  if any, that SAB 101 will have on our financial statements. We believe that SAB
  101, to the extent it is applicable to us, will not effect the underlying
  strength or weakness of our business operations as measured by the dollar value
  of our shipments and cash flows.
  
                                         46
  The section entitled Certain Business Risk should be deleted and replaced with
  the following section:
  
                              CERTAIN BUSINESS RISK
  
     Before making an investment decision, you should carefully consider the risks
  described below. The risks and uncertainties described below are not the only
  ones facing our company. Additional risks and uncertainties not presently known
  to us or that we currently deem immaterial also may impair our business
  operations. If any of the following risks actually occur, our business could be
  harmed. In such case, the trading price of our common stock could decline, and
  you may lose all or part of your investment.
  
                           Risks Related to Our Business
  
  We have a limited operating history and a history of losses.
  
     We have a limited operating history, and it is difficult to predict our
  future operating results. We began shipping products commercially in June 1997,
  and we only have been shipping products in volume since the first quarter of
  1998. As of March 31, 2000, we had an accumulated deficit of $176.8 million. We
  believe that we will continue to experience net losses for the foreseeable
  future. Most of our expenses are fixed in advance, and we generally are unable
  to reduce our expenses significantly in the short term to compensate for any
  unexpected delay or decrease in anticipated revenues. We expect to continue to
  increase expenses for the foreseeable future to support increased sales and
  marketing and technical support costs. Any significant delay in our anticipated
  revenues or commercialization of new products would harm our business. The
  revenue and profit potential of our business and our industry are unproven. We
  had negative gross margins from our inception until the fourth quarter of 1998,
  and any future revenue growth may not result in positive gross margins or
  operating profits in future periods.
  
  Our operating results may fluctuate.
  
     Our quarterly revenues are likely to fluctuate significantly in the future
  due to a number of factors, many of which are outside our control. Factors that
  could affect our revenues include the following:
  
    .  variations in the timing of orders and shipments of our products;
  
    .  variations in the size of the orders by our customers;
  
    .  new product introductions by competitors;
  
    .  delays in our introduction of new products;
  
    .  delays in our receipt of orders forecasted by our customers;
  
    .  delays by our customers in the completion of upgrades to their cable
       infrastructure;
  
    .  variations in capital spending budgets of broadband access service
       providers;
  
    .  adoption of industry standards and the inclusion in or compatibility of
       our technology with any such standards; and
  
    .  delays in obtaining regulatory approval for commercial deployment of
       cable modem systems.
  
     Our expenses generally will vary from quarter to quarter depending on the
  level of actual and anticipated business activities. Research and development
  expenses will vary as we begin development of new products and as our
  development programs move to wafer fabrication and prototype development, which
  results in higher engineering expenses.
  
                                         47
  A variety of factors affect our gross margin, including the following:
  
    .  the sales mix of our products;
  
    .  the volume of products manufactured;
  
    .  the type of distribution channel through which we sell our products;
  
    .  the average selling prices or "ASPs" of our products; and
  
    .  the effectiveness of our cost reduction measures.
  
     We anticipate that unit ASPs of our products will decline in the future.
  This could cause a decrease in the gross margins for these products. In
  addition, the maturity of TeraComm system deployments affects our gross margin.
  New deployments of the TeraComm system involve the sale of headend equipment
  (which has higher margins) and generally involve smaller quantities of product.
  New deployments typically are sold at higher margins than the larger volume
  sales of product associated with more mature deployments of the TeraComm
  system. The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways
  and TeraPro cable modems also affects our gross margin. The TeraPro cable
  modems have significantly lower margins than the TeraLink 1000 Master
  Controller and TeraLink Gateway headend products. We expect to achieve
  significantly lower margins on the TeraPro cable modems for the foreseeable
  future. Further, we expect that sales of TeraPro cable modems will continue to
  constitute a significant portion of our revenues for the foreseeable future.
  
     We also anticipate that our operating results will be impacted by sales,
  gross profit and operating expenses of acquired companies. The impact of these
  factors on our operating results will vary as we acquire additional companies.
  
  We are dependent on a small number of customers.
  
     Four customers accounted for approximately 64% of our revenues for the
  quarter ended March 31, 2000 and three customers accounted for approximately
  63% of our revenues for the quarter ended March 31, 1999. We believe that a
  substantial majority of our revenues will continue to be derived from sales to
  a relatively small number of customers for the foreseeable future. In addition,
  we believe that sales to these customers will be focused on a limited number of
  projects.
  
     The cable industry is undergoing significant consolidation in North America
  and internationally, and a limited number of cable operators controls an
  increasing number of cable systems. Currently, ten cable operators in the
  United States own and operate facilities passing approximately 86% of total
  homes passed. In addition, the North American DSL market is concentrated with
  the major ILECs, constituting a significant percentage of the market. As a
  result, our sales will be largely dependent upon product acceptance by the
  leading broadband service providers. Currently, the timing and size of each
  customer's order is critical to our operating results. Our major customers are
  likely to have significant negotiating leverage and may attempt to change the
  terms, including pricing, upon which we do business with them. These customers
  also may require longer payment terms than we anticipate, which could require
  us to raise additional capital to meet our working capital requirements.
  
  Acquisitions could result in dilution, operating difficulties and other adverse
  consequences.
  
     We have acquired seven businesses since September 1999: Imedia Corporation
  in September 1999; Radwiz in November 1999; Telegate in January 2000; ANE in
  April 2000; ComBox in April 2000; some assets of Internet Telecom in April
  2000; and Ultracom in April
  
                                         48
  2000. If appropriate opportunities present themselves, we intend to acquire
  additional businesses, technologies, services or products that we believe are
  strategic. The process of integrating any acquired business into our business
  and operations is risky and may create unforeseen operating difficulties and
  expenditures. The areas in which we may face difficulties include:
  
    .  diversion of management time (both ours and that of the acquired
       companies) during the period of negotiation through closing and after
       closing from the ongoing development of our businesses, issues of
       integration and future products;
  
    .  decline in employee morale and retention issues resulting from changes
       in compensation, reporting relationships, future prospects or the
       direction of the business;
  
     We typically sell products to our customers pursuant to purchase orders, and
  we therefore generally do not have long-term agreements in place with our
  customers.
  
    .  the need to integrate each company's accounting, management information,
       human resource and other administrative systems to permit effective
       management, and the lack of control if this integration is delayed or
       not implemented; and
  
    .  the need to implement controls, procedures and policies appropriate for
       a larger public group of companies that prior to acquisition had been
       smaller, private companies.
  
     We have very limited experience in managing this integration process.
  Moreover, the anticipated benefits of any or all of these completed or pending
  acquisitions may not be realized. Future acquisitions could result in
  potentially dilutive issuances of equity securities, the incurrence of
  additional debt, contingent liabilities or amortization expenses related to
  goodwill and other intangible assets, any of which could harm our business.
  Future acquisitions also could require us to obtain additional equity or debt
  financing, which may not be available on favorable terms or at all. Even if
  available, this financing may be dilutive.
  
  The sales cycle for our products is lengthy.
  
     The sales cycle associated with our products typically is lengthy, often
  lasting six months to a year. Our customers typically conduct significant
  technical evaluations of competing technologies prior to the commitment of
  capital and other resources. In addition, purchasing decisions may be delayed
  because of our customers' internal budget approval procedures. Sales also
  generally are subject to customer trials, which typically last three months.
  Because of the lengthy sales cycle and the large size of customers' orders, if
  orders forecasted for a specific customer for a particular quarter do not occur
  in that quarter, our operating results for that quarter could suffer.
  
  There are many risks associated with our participation in the establishment of
  advanced physical layer specifications to be added to DOCSIS.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2 (Data Over
  Cable Service Interface Specifications), an enhanced version of the DOCSIS
  cable modem specification based in part on our S-CDMA technology. In September
  1999, CableLabs indicated that it intended to proceed with the advanced
  physical layer ("PHY") work on two parallel tracks: one for the development of
  a prototype based on our S-CDMA technology and
  
                                         49
  one for the inclusion of Advanced TDMA technology (Time Division Multiple
  Access), as proposed by other companies. In February 2000, CableLabs further
  clarified the status of the advanced PHY project regarding a separate release
  that will include TDMA technologies. In addition, CableLabs reiterated that it
  is continuing to work with us on the development of a DOCSIS specification that
  could include our S-CDMA technology. To that end, CableLabs has requested that
  we submit a prototype of a DOCSIS system that incorporates an S-CDMA advanced
  PHY capability for testing. CableLabs has stated that if the testing of this
  prototype reveals that the S-CDMA advanced PHY works as claimed (including
  proper backwards compatibility and coexistence with the other aspects of
  DOCSIS), and if the costs for adding S-CDMA to DOCSIS products are in line with
  estimates, then it is likely, but not certain, that S-CDMA advanced PHY
  capabilities will be included in a future version of the DOCSIS specification.
  The prototype we submit to CableLabs may fail to demonstrate the level of
  performance that CableLabs seeks; even if it does meet performance expectations
  there can be no guarantee that CableLabs will incorporate the technology into a
  future version of DOCSIS specifications. In addition, if CableLabs does proceed
  to include S-CDMA in a future DOCSIS specification, there can be no guarantee
  that the DOCSIS S-CDMA specification will be the same as the specification we
  incorporated in the prototype submitted for tests, which may require us to
  further develop our prototype.
  
     Our future revenues and operating results are likely to suffer if S-CDMA is
  not included in a future release of DOCSIS. We also may incur substantial
  additional research and development expenditures to adapt our specifications to
  the version adopted by CableLabs. CableLabs has not established a schedule for
  adding the S-CDMA capabilities to the DOCSIS specifications. Delays in the
  establishment of a final specification for S-CDMA in DOCSIS could harm our
  plans to sell DOCSIS compatible modems and headend equipment. In particular, if
  the final DOCSIS S-CDMA specification is not approved prior to the time when we
  are ready to ship DOCSIS products with S-CDMA features included, then we may be
  required to delay the introduction of those products until the DOCSIS S-CDMA
  specification is released or to introduce the S-CDMA features as proprietary
  enhancements to a standard DOCSIS product. Either one of these events could
  harm revenues and operating results.
  
     We have already given CableLabs assurances that we will contribute some
  aspects of our proprietary S-CDMA technology to a royalty-free intellectual
  property pool, if S-CDMA is included in a future version of DOCSIS
  specifications. This royalty-free pool has been established by CableLabs to
  facilitate the participation of as many vendors as possible in providing
  equipment that is compatible with the DOCSIS specifications. As a result, any
  of our competitors who join the DOCSIS intellectual property pool would have
  access to some aspects of our technology and would not be required to pay us
  any royalties or other compensation. If a competitor is able to duplicate the
  functionality and capabilities of our technology, we could lose some or all of
  the time-to-market advantage we might otherwise have, which could harm our
  future revenues and operating results.
  
     We believe the addition of advanced upstream PHY capabilities to DOCSIS will
  increase the overall market for DOCSIS-compatible products, and as such will
  result in increased competition in the cable modem market. This competition
  could come from existing competitors or from new competitors who enter the
  market as a result of the enhancements to the specifications. This increased
  competition is likely to result in lower ASPs of cable modem systems and could
  harm revenues and gross margins. Because our competitors will be able to
  incorporate some aspects of our technology into their products, our current
  customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
  cable modems with advanced PHY capabilities from multiple suppliers. We may be
  unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
  more quickly or at lower cost than
  
                                         50
  our competitors. The inclusion of our S-CDMA technology in future DOCSIS
  specification could result in increased competition for the services of our
  existing employees who have experience with S-CDMA. The loss of these employees
  to one or more competitors could harm our business.
  
     DOCSIS standards have not yet been accepted in Europe and Asia. An alternate
  standard for cable modem systems, called the EuroModem standard, or DAVIC/DVB,
  has been formalized, and some European cable system operators have embraced it.
  We intend to develop and sell products that comply with the EuroModem standard
  and to pursue having portions of our S-CDMA technology included in a future
  version of the EuroModem standard. We may be unsuccessful in these efforts.
  
  We need to develop new products in order to remain competitive.
  
     Our future success will depend in part on our ability to develop, introduce
  and market new products in a timely manner. We also must respond to competitive
  pressures, evolving industry standards and technological advances. Our current
  S-CDMA products are not DOCSIS-compliant. We are currently developing a
  prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY
  capability for testing and eventual inclusion in the DOCSIS standard. There is
  no guarantee that we will be successful in developing the prototype or that the
  prototype, if successfully developed, will be included in a future release of
  the DOCSIS standard. We anticipate that during 2000, existing or potential
  customers may delay purchases of our TeraComm system in order to purchase
  systems that comply with the DOCSIS standard. In addition, potential new
  customers could decide to purchase DOCSIS-compliant products from one or more
  of our competitors rather than from us. As a result, our product sales in the
  second half of 2000 may be lower than we anticipate. In order to promote sales
  of our currents products we may be required to reduce our prices for sales to
  existing customers. This would harm our operating results and gross margin.
  
     As a result of the inclusion of TDMA technology in the new DOCSIS version
  announced by CableLabs in February 2000, we will have to incorporate advanced
  TDMA technology into our DOCSIS-compliant products. If we are unable to do this
  effectively, or in a timely manner, we will lose some or all of the time-to-
  market advantage we might otherwise have had.
  
     Our future success will also depend on our ability to develop and market
  products for broadband applications over DSL and wireless networks. The markets
  for these broadband applications are also subject to evolving standards, such
  as NEBS compliance in the North American DSL market, and technological advances
  in these arenas. There is no guarantee that we will be successful in developing
  products that are compliant with these standards or that we will be successful
  in keeping pace with future technological advances in this arena.
  
  Average selling prices of broadband access equipment typically decrease.
  
     The broadband access systems market has been characterized by erosion of
  average selling prices. We expect this to continue. This erosion is due to a
  number of factors, including competition, rapid technological change and price
  performance enhancements. The ASPs for our products may be lower than expected
  as a result of competitive pricing pressures, our promotional programs and
  customers who negotiate price reductions in exchange for longer term purchase
  commitments. We anticipate that ASPs and gross margins for our products will
  decrease over product life cycles. In addition, we believe that the widespread
  adoption of industry standards is likely to further erode ASPs, particularly
  for cable modems and other similar consumer premise equipment. It is likely
  that the widespread adoption of industry standards will result in increased
  retail distribution of cable modems and other similar
  
                                         51
  consumer premise equipment, which could put further price pressure on our
  products. Decreasing ASPs could result in decreased revenue even if the number
  of units sold increases. As a result, we may experience substantial period-to-
  period fluctuations in future operating results due to ASP erosion. Therefore,
  we must continue to develop and introduce on a timely basis next-generation
  products with enhanced functionalities that can be sold at higher gross
  margins. Our failure to do this could cause our revenues and gross margin to
  decline.
  
  We must achieve cost reductions.
  
     Certain of our competitors currently offer products at prices lower than
  ours. Market acceptance of our products will depend in part on reductions in
  the unit cost of our products. We expect that as headend equipment becomes more
  widely deployed, the price of cable modems and other similar consumer premise
  equipment will decline. In particular, we believe that the widespread adoption
  of industry standards such as DOCSIS will cause increased price competition for
  consumer premise equipment. However, we may be unable to reduce the cost of our
  products sufficiently to enable us to compete with other suppliers. Our cost
  reduction efforts may not allow us to keep pace with competitive pricing
  pressures or lead to gross margin improvement.
  
     Some of our competitors are larger and manufacture products in significantly
  greater quantities than we intend to for the foreseeable future. Consequently,
  these competitors have more leverage in obtaining favorable pricing from
  suppliers and manufacturers. In order to remain competitive, we must
  significantly reduce the cost of manufacturing our cable modems through design
  and engineering changes. We may not be successful in redesigning our products.
  Even if we are successful, our redesign may be delayed or may contain
  significant errors and product defects. In addition, any redesign may not
  result in sufficient cost reductions to allow us to significantly reduce the
  list price of our products or improve our gross margin. Reductions in our
  manufacturing costs will require us to use more highly integrated components in
  future products and may require us to enter into high volume or long-term
  purchase or manufacturing agreements. Volume purchase or manufacturing
  agreements may not be available on acceptable terms. We could incur expenses
  without related revenues if we enter into a high volume or long-term purchase
  or manufacturing agreement and then decide that we cannot use the products or
  services offered by such agreement.
  
  We must keep pace with rapid technological change to remain competitive.
  
     The markets for our products are characterized by rapid technological
  change, evolving industry standards, changes in end-user requirements and
  frequent new product introductions and enhancements. Our future success will
  depend upon our ability to enhance our existing products and to develop and
  introduce new products that achieve market acceptance. Providers of broadband
  access services may adopt alternative technologies or they may deploy
  alternative services that are incompatible with our products.
  
     The demand for broadband access services has resulted in the development of
  several competing modulation technologies. For example, some of our cable
  products utilize a modulation technology known as S-CDMA, while several of our
  competitors utilize modulation technologies known as TDMA and Frequency
  Division Multiple Access or "FDMA." Our headend equipment and cable modem
  products currently are not interoperable with the headend equipment and modems
  of other suppliers of broadband access products. As a result, potential
  customers who wish to purchase broadband access products from multiple
  
                                         52
  suppliers may be reluctant to purchase our products. Although our technology
  may be incorporated into a future version of a DOCSIS specification or another
  industry standard, we cannot be certain that major cable operators will adopt
  these standards. Major cable operators may not adopt products or technologies
  based on our current proprietary S-CDMA technology or on any future industry
  standard S-CDMA technology. Further, major cable operators may adopt products
  or standards technologies based on competing modulation technologies. If
  competitors using other modulation technologies can incorporate functionality
  and capabilities currently found in S-CDMA, the value of our S-CDMA technology
  would be diminished.
  
  Broadband access services have not achieved widespread market acceptance, and
  many competing technologies exist.
  
     Our success will depend upon the widespread commercial acceptance of
  broadband access services by service providers and end users of broadband
  access services. The market for these services is not fully developed. We
  cannot accurately predict the future growth rate or the ultimate size of the
  market for broadband access services. Potential users of our products may have
  concerns regarding the security, reliability, cost, ease of installation and
  use and capability of broadband access services in general.
  
     The market for our products may be impacted by the development of other
  technologies that enable the provisioning of broadband access services and the
  deployment of services over other media. Widespread acceptance of other
  technologies or deployment of services over media not supported by our products
  could materially limit acceptance of our broadband access systems. Broadband
  access services based on our products and technology may fail to gain
  widespread commercial acceptance by providers of broadband access services and
  end users. In addition, we only recently began to offer products based on
  alternate technologies such as DSL. We may not be successful in marketing and
  selling these products.
  
  We need to develop additional distribution channels.
  
     We presently market our TeraComm system to cable operators and systems
  integrators. We believe that much of the North American cable modem market may
  shift to a retail distribution model. Accordingly, we may need to redirect our
  future marketing efforts to sell our cable modems directly to retail
  distributors and end users. This shift would require us to establish new
  distribution channels for our products. We may be unable to establish these
  additional distribution channels. If we do establish them, we may be unable to
  hire the additional personnel necessary to foster and enhance such distribution
  channels. In addition, if the cable modem market shifts to a retail
  distribution model, we may not successfully establish a retail distribution
  presence. To the extent that large consumer electronics companies enter the
  cable modem market, their well-established retail distribution capabilities
  would provide them with a significant competitive advantage.
  
  We may be unable to market effectively to broadband access service providers.
  
     Our growth and future success will be substantially dependent upon our
  ability to convince providers of broadband access services to adopt our
  technologies, purchase our products and effectively market our products to end
  users. Our potential customers are likely to prefer purchasing products from
  established manufacturing companies that can demonstrate the capability to
  supply large volumes of products on short notice. In addition, many of our
  potential customers may be reluctant to adopt technologies that have not gained
  acceptance among other providers of similar services. This reluctance could
  result in lengthy product testing and acceptance cycles for our products.
  Consequently, the impediments to our initial sales may be even greater than
  those to later sales.
  
                                         53
  No established distribution network in the cable modem industry exists that
  would provide us with easy access to smaller or geographically diverse cable
  operators. Therefore, our initial sales to larger, more established cable
  operators are critical to our business. Although we intend to establish
  strategic relationships with leading distributors worldwide, we may not succeed
  in establishing these relationships. Even if we do establish these
  relationships, the distributors may not succeed in marketing our products to
  cable operators. Some of our competitors have already established relationships
  with certain cable operators. These established relationships may further limit
  our ability to sell products to those cable operators. We do not have long,
  well-established relationships with those cable operators. If we were to sell
  our products to those cable operators, it would likely not be based on long-
  term contracts and those customers would be able to terminate their
  relationships with us at any time. In addition, one or more of our current
  customers could cancel its relationship with us at any time.
  
     We have recently begun marketing and selling our products to providers of
  DSL and wireless broadband services and thus we have very limited experience.
  We do not have long, well-established relationships with these providers, and
  we may not be successful in establishing these relationships.
  
  We are dependent on broadband service providers choosing to offer additional
  services to their customers.
  
     We depend on cable operators to purchase our cable modem systems and to
  provide our cable modems to end users. Cable operators have a limited amount of
  available bandwidth over which they can offer robust data services, and they
  may not choose to provide these data services to their customers. If cable
  operators choose to provide these services, we also will depend upon them to
  market these services to cable customers, to install our equipment and to
  provide support to end users. In addition, we will be highly dependent on cable
  operators to continue to maintain their cable infrastructure in a manner that
  allows us to provide consistently high performance and reliable services. Our
  success also will depend upon the acceptance of our products by other providers
  of services to the cable industry, such as Excite@Home's @Home Network and Road
  Runner, a joint venture between MediaOne Group, Inc. and Time Warner Cable.
  Sales of our DSL and wireless products are also dependent on service providers
  choosing to purchase our products and to provide additional services to their
  end users.
  
  Sales of our cable products are dependent on the cable industry upgrading to
  two-way cable infrastructure.
  
     Demand for our products will depend, to a significant degree, upon the
  magnitude and timing of capital spending by cable operators for implementation
  of access systems for data transmission over cable networks. This involves the
  enabling of two-way transmission over existing coaxial cable networks and the
  eventual upgrade to HFC in areas of higher penetration of data services. If
  cable operators fail to complete these upgrades of their cable infrastructures
  in a timely and satisfactory manner, the market for our products could be
  limited. In addition, few businesses in the United States currently have cable
  access. Cable operators may not choose to upgrade existing residential cable
  systems or to install new cable systems to serve business locations.
  
     The success and future growth of our business will be subject to economic
  and other factors affecting the cable television industry generally,
  particularly its ability to finance substantial capital expenditures. Capital
  spending levels in the cable industry in the United
  
                                         54
  States have fluctuated significantly in the past, and we believe that such
  fluctuations will occur in the future. The capital spending patterns of cable
  operators are dependent on a variety of factors, including the following:
  
    .  the availability of financing;
  
    .  cable operators' annual budget cycles, as well as the typical reduction
       in upgrade projects during the winter months;
  
    .  the status of federal, local and foreign government regulation and
       deregulation of the telecommunications industry;
  
    .  overall demand for cable services;
  
    .  competitive pressures (including the availability of alternative data
       transmission and access technologies);
  
    .  discretionary consumer spending patterns; and
  
    .  general economic conditions.
  
     In recent periods, the United States cable market has been characterized by
  the acquisition of smaller and independent cable operators by large cable
  operators. We cannot predict the effect, if any, that consolidation in the
  United States cable industry will have on overall capital spending patterns by
  cable operators. The effect on our business of further industry consolidation
  also is uncertain.
  
  Supply of our products may be limited by our ability to forecast demand
  accurately.
  
     The emerging nature of the broadband access services market makes it
  difficult for us to accurately forecast demand for our products. Our inability
  to accurately forecast the actual demand for our products could result in
  supply, manufacturing or testing capacity constraints. These constraints could
  result in delays in the delivery of our products or the loss of existing or
  potential customers, either of which could have a negative impact on our
  business, operating results or financial condition. In addition, we had
  unconditional purchase obligations of approximately $125.7 million as of March
  31, 2000, primarily to purchase minimum quantities of materials and components
  used to manufacture our products. We must fulfill these obligations even if
  demand for our products is lower than we anticipate.
  
  We are dependent on key third-party suppliers.
  
     We manufacture all of our products using components or subassemblies
  procured from third-party suppliers. Some of these components are available
  from a single source and others are available from limited sources. All of our
  sales are from products containing one or more components that are available
  only from single supply sources. In addition, some of the components are custom
  parts produced to our specifications. For example, we currently rely on Philips
  Semiconductors, Inc. to supply a custom ASIC that is used in our products.
  Other components, such as the radio frequency tuner and some surface acoustic
  wave filters, are procured from sole source suppliers. Any interruption in the
  operations of vendors of sole source parts could adversely affect our ability
  to meet our scheduled product deliveries to customers. We are dependent on
  semiconductor manufacturers and are affected by worldwide conditions in the
  semiconductor market. If we are unable to obtain a sufficient supply of
  components from our current sources, we could experience difficulties in
  obtaining alternative sources or in altering product designs to use alternative
  components. Resulting delays or reductions in product shipments could damage
  customer relationships. Further, a significant increase in the price of one or
  more of these components could harm our gross margin or operating results.
  
                                         55
  Shortages in supplies of components may impair our ability to meet customer
  demands.
  
     Due to increasing demand for electronic and communications equipment, the
  worldwide market for component parts is currently constrained. Delays in key
  component or product deliveries may occur due to shortages resulting from a
  limited number of suppliers, the financial or other difficulties of such
  suppliers or a limitation in component product availability. Due to these
  current market conditions, we face the risk of possible shortages of certain
  key components that could result in product performance shortfalls and reduced
  control over or delay in delivery schedules, manufacturing capability, quality
  and costs, all of which could impair our ability to produce enough product to
  meet our customer demand. In addition, in order to fulfill demand for our
  products, we may have to purchase these components on the spot market at a
  price that may be higher than we have experienced in the past.
  
     Although we work closely with our suppliers to avoid these types of
  shortages, there can be no assurance that we will not encounter these problems
  in the future. While our suppliers have performed effectively and been
  relatively flexible to date, we believe that we will be faced with the
  following challenges going forward:
  
    .  New markets in which we participate may grow quickly and consume
       component capacity; and
  
    .  As we continue to acquire companies and new technologies, we are
       dependent, at least initially, on unfamiliar supply chains or relatively
       small supply partners.
  
     Manufacturing capacity and component supply constraints could be significant
  issues for us. If we were unable to obtain adequate quantities of significant
  component materials on a timely basis, our business and our customer
  relationships would be adversely affected. If we are unable to satisfy our
  customers' demand, our customers could decide to purchase products from our
  competitors. Inability to meet demand, or a decision by one or more of our
  customers to purchase from our competitors, could harm our operating results.
  
  We may be unable to migrate to new semiconductor process technologies
  successfully or on a timely basis.
  
     Our future success will depend in part upon our ability to develop products
  that utilize new semiconductor process technologies. These technologies change
  rapidly and require us to spend significant amounts on research and
  development. We continuously evaluate the benefits of redesigning our
  integrated circuits using smaller geometry process technologies to improve
  performance and reduce costs. The transition of our products to integrated
  circuits with increasingly smaller geometries will be important to our
  competitive position. Other companies have experienced difficulty in migrating
  to new semiconductor processes and, consequently, have suffered reduced yields,
  delays in product deliveries and increased expense levels. Moreover, we depend
  on our relationship with our third-party manufacturers to migrate to smaller
  geometry processes successfully.
  
  Our ability to directly control product delivery schedules and product quality
  is dependent on third-party contract manufacturers.
  
     Most of our products are assembled and tested by contract manufacturers
  using testing equipment that we provide. As a result of our dependence on these
  contract manufacturers for assembly and testing of our products, we do not
  directly control product delivery schedules or product quality. Any product
  shortages or quality assurance problems could increase the costs of
  manufacture, assembly or testing of our products. In addition, as manufacturing
  volume increases, we will need to procure and assemble additional testing
  equipment and provide it
  
                                         56
  to our contract manufacturers. The production and assembly of testing equipment
  typically requires significant time. We could experience significant delays in
  the shipment of our products if we are unable to provide this testing equipment
  to our contract manufacturers in a timely manner.
  
  There are many risks associated with international operations.
  
     Sales to customers outside of the United States accounted for approximately
  84% of our revenues in 1999 and approximately 74% of our revenues in 1998. We
  expect sales to customers outside of the United States to continue to represent
  a significant percentage of our revenues for the foreseeable future.
  International sales are subject to a number of risks, including the following:
  
    .  changes in foreign government regulations and communications standards;
  
    .  export license requirements, tariffs and taxes;
  
    .  other trade barriers;
  
    .  difficulty in protecting intellectual property;
  
    .  difficulty in collecting accounts receivable;
  
    .  difficulty in managing foreign operations; and
  
    .  political and economic instability.
  
     If our customers are affected by currency devaluations or general economic
  crises, such as the recent economic crisis affecting many Asian and Latin
  American economies, their ability to purchase our products could be reduced
  significantly. Payment cycles for international customers typically are longer
  than those for customers in the United States. Foreign markets for our products
  may develop more slowly than currently anticipated. Foreign countries may
  decide not to construct cable infrastructure or may prohibit, terminate or
  delay the construction of new cable plants for a variety of reasons. These
  reasons include environmental issues, economic downturns, the availability of
  favorable pricing for other communications services or the availability and
  cost of related equipment. Any action like this by foreign countries would
  reduce the market for our products.
  
     We anticipate that our foreign sales generally will be invoiced in U.S.
  dollars, and we currently do not plan to engage in foreign currency hedging
  transactions. However, as we commence and expand our international operations,
  we may be paid in foreign currencies and exposure to losses in foreign currency
  transactions may increase. We may choose to limit our exposure by the purchase
  of forward foreign exchange contracts or through similar hedging strategies. No
  currency hedging strategy can fully protect against exchange-related losses. In
  addition, if the relative value of the U.S. dollar in comparison to the
  currency of our foreign customers should increase, the resulting effective
  price increase of our products to those foreign customers could result in
  decreased sales.
  
  We may be unable to provide adequate customer support.
  
     Our ability to achieve our planned sales growth and retain current and
  future customers will depend in part upon the quality of our customer support
  operations. Our customers generally require significant support and training
  with respect to our broadband access systems, particularly in the initial
  deployment and implementation stages. To date our sales have been concentrated
  in a small number of customers. We have limited experience with widespread
  deployment of our products to a diverse customer base. We may not have
  
                                         57
  adequate personnel to provide the levels of support that our customers may
  require during initial product deployment or on an ongoing basis. Our inability
  to provide sufficient support to our customers could delay or prevent the
  successful deployment of our products. In addition, our failure to provide
  adequate support could harm our reputation and relationship with our customers
  and could prevent us from gaining new customers.
  
  Our industry is highly competitive with many established competitors.
  
     The market for broadband access systems is extremely competitive and is
  characterized by rapid technological change. Our direct competitors in the
  cable access systems arena include Cisco Systems, Com21, General Instrument,
  Matsushita Electric Industrial (which markets products under the brand name
  "Panasonic"), Motorola, Nortel Networks, Vyyo, Thomson Consumer Electronics
  (which markets products under the brand name "RCA"), Samsung, Scientific-
  Atlanta, Sony, 3Com, Toshiba and Zenith Electronics. We also compete with
  companies that develop integrated circuits for broadband access products, such
  as Broadcom, Conexant and Texas Instruments. We also sell products that compete
  with existing data access and transmission systems utilizing the
  telecommunications networks, such as those of 3Com. Additionally, our
  controller and headend system products face intense competition from well-
  established companies such as Cisco, Nortel and 3Com. In addition, we compete
  with companies in the DSL arena such as ECI, Charles Industries, Pairgain,
  Copper Mountain, Accelerated Networks, Integral Access and VINA Technologies.
  As standards, such as DOCSIS, are developed for broadband access systems, other
  companies may enter the broadband access systems market. The principal
  competitive factors in our market include the following:
  
    .  product performance, features and reliability;
  
    .  price;
  
    .  size and stability of operations;
  
    .  breadth of product line;
  
    .  sales and distribution capability;
  
    .  technical support and service;
  
    .  relationships with providers of broadband access services; and
  
    .  compliance with industry standards.
  
     Some of these factors are outside of our control. The existing conditions in
  the broadband access market could change rapidly and significantly as a result
  of technological advancements. The development and market acceptance of
  alternative technologies could decrease the demand for our products or render
  them obsolete. Our competitors may introduce broadband access products that are
  less costly, provide superior performance or achieve greater market acceptance
  than our products.
  
     Many of our current and potential competitors have significantly greater
  financial, technical, marketing, distribution, customer support and other
  resources, as well as greater name recognition and access to customers than we
  do. The anticipated widespread adoption of DOCSIS and other industry standards
  is likely to cause increased worldwide price competition, particularly in the
  North American market. The adoption of DOCSIS and these other standards also
  could result in lower sales of our TeraComm system, including the higher margin
  headend products. Any increased price competition or reduction in sales of our
  headend products would result in downward pressure on our gross margin. We
  cannot accurately predict how the competitive pressures that we face will
  affect our business.
  
                                         58
  Our business is dependent on the Internet and the development of the Internet
  infrastructure.
  
     Our success will depend in large part on increased use of the Internet to
  increase the need for high speed broadband access networks. Critical issues
  concerning the commercial use of the Internet remain largely unresolved and are
  likely to affect the development of the market for our products. These issues
  include security, reliability, cost, ease of access and quality of service. Our
  success also will depend on the growth of the use of the Internet by
  businesses, particularly for applications that utilize multimedia content and
  thus require high bandwidth. The recent growth in the use of the Internet has
  caused frequent periods of performance degradation. This has required the
  upgrade of routers, telecommunications links and other components forming the
  infrastructure of the Internet by Internet service providers and other
  organizations with links to the Internet. Any perceived degradation in the
  performance of the Internet as a whole could undermine the benefits of our
  products. Potentially increased performance provided by our products and the
  products of others ultimately is limited by and reliant upon the speed and
  reliability of the Internet backbone itself. Consequently, the emergence and
  growth of the market for our products will depend on improvements being made to
  the entire Internet infrastructure to alleviate overloading and congestion.
  
  Our failure to manage growth could adversely affect us.
  
     The growth of our business has placed, and is expected to continue to place,
  a significant strain on our limited personnel, management and other resources.
  Our management, personnel, systems, procedures and controls may be inadequate
  to support our existing and future operations. To manage any future growth
  effectively, we will need to attract, train, motivate, manage and retain
  employees successfully, to integrate new employees into our overall operations
  and to continue to improve our operational, financial and management systems.
  
  We are dependent on key personnel.
  
     Due to the specialized nature of our business, we are highly dependent on
  the continued service of, and on the ability to attract and retain qualified
  engineering, sales, marketing and senior management personnel. The competition
  for personnel is intense. The loss of any of these individuals, particularly
  our Chairman, President and Chief Technical Officer, Shlomo Rakib, and our
  Chief Executive Officer, Zaki Rakib, would harm our business. In addition, if
  we are unable to hire additional qualified personnel as needed, we may be
  unable to adequately manage and complete our existing sales commitments and to
  bid for and execute additional sales. Further, we must train and manage our
  growing employee base, which is likely to require increased levels of
  responsibility for both existing and new management personnel. Our current
  management personnel and systems may be inadequate, and we may fail to
  assimilate new employees successfully.
  
     Highly skilled employees with the education and training that we require,
  especially employees with significant experience and expertise in both data
  networking and radio frequency design, are in high demand. We may not be able
  to continue to attract and retain the qualified personnel necessary for the
  development of our business. We do not have "key person" insurance coverage for
  the loss of any of our employees. Any officer or employee of our company can
  terminate his or her relationship with us at any time. Our employees generally
  are not bound by non-competition agreements with us.
  
  Our business is subject to the risks of product returns, product liability and
  product defects.
  
     Products as complex as ours frequently contain undetected errors or
  failures, especially when first introduced or when new versions are released.
  Despite testing, errors may occur.
  
                                         59
  The occurrence of errors could result in product returns and other losses to
  our company or our customers. This occurrence also could result in the loss of
  or delay in market acceptance of our products. Due to the recent introduction
  of our products, we have limited experience with the problems that could arise
  with this generation of products. However, the limitation of liability
  provision contained in our purchase agreements may not be effective as a result
  of federal, state or local laws or ordinances or unfavorable judicial decisions
  in the United States or other countries. We have not experienced any product
  liability claims to date, but the sale and support of our products entails the
  risk of such claims. In addition, any failure by our products to properly
  perform could result in claims against us by our customers. We maintain
  insurance to protect against certain claims associated with the use of our
  products, but our insurance coverage may not adequately cover any claim
  asserted against us. In addition, even claims that ultimately are unsuccessful
  could result in our expenditure of funds in litigation and management time and
  resources.
  
  We may be unable to adequately protect or enforce our intellectual property
  rights.
  
     We rely on a combination of patent, trade secret, copyright and trademark
  laws and contractual restrictions to establish and protect proprietary rights
  in our products. Our pending patent applications may not be granted. Even if
  they are granted, the claims covered by the patents may be reduced from those
  included in our applications. Any patent might be subject to challenge in court
  and, whether or not challenged, might not be broad enough to prevent third
  parties from developing equivalent technologies or products without taking a
  license from us. We have entered into confidentiality and invention assignment
  agreements with our employees, and we enter into non-disclosure agreements with
  some of our suppliers, distributors and appropriate customers so as to limit
  access to and disclosure of our proprietary information. These statutory and
  contractual arrangements may not prove sufficient to prevent misappropriation
  of our technology or to deter independent third-party development of similar
  technologies. In addition, the laws of some foreign countries might not protect
  our products or intellectual property rights to the same extent as do the laws
  of the United States. Protection of our intellectual property might not be
  available in every country in which our products might be manufactured,
  marketed or sold.
  
     In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
  version of the DOCSIS cable modem specification based in part on our S-CDMA
  technology. In September 1999, CableLabs indicated that it intended to proceed
  with the advanced PHY work on two parallel tracks: one for the development of a
  prototype based on our S-CDMA technology and one for the inclusion of Advanced
  TDMA technology, as proposed by other companies. In February 2000, CableLabs
  further clarified the status of the advanced PHY project regarding a separate
  release that will include TDMA technologies. In addition, CableLabs reiterated
  that it is continuing to work with us on the development of a DOCSIS
  specification that could include our S-CDMA technology. To that end, we have
  indicated to CableLabs that we would contribute some aspects of our S-CDMA
  technology to the DOCSIS intellectual property pool if and when a DOCSIS
  specification is approved that includes our S-CDMA technology.
  
     We would contribute our technology pursuant to a license agreement with
  CableLabs that we would execute at that time, and which contains the terms that
  CableLabs has established for the inclusion of any intellectual property from
  any source in the DOCSIS specifications. Under the terms of the proposed
  license agreement, we would grant to CableLabs a royalty-free license for those
  aspects of our S-CDMA technology that are essential for compliance with the
  DOCSIS cable modem standard. So-called "implementation know how" is not covered
  by this license-only those aspects of the technology that are essential to
  implementing a
  
                                         60
  compliant product. CableLabs would have the right to extend royalty-free
  sublicenses to companies that wish to build DOCSIS-compatible products. These
  sublicenses would allow participating companies to utilize and incorporate the
  essential portions of the S-CDMA technology on a royalty-free basis for the
  limited use of making and selling products or systems that comply with the
  DOCSIS cable modem specification. Terayon has already joined the DOCSIS
  intellectual property pool and, as a result, we have a royalty-free sublicense
  that allows us to ship DOCSIS-compatible products which contain intellectual
  property submitted by other companies. The scope of this license would not
  extend to the use of the S-CDMA technology in other areas; only for products
  that comply with the DOCSIS specifications. As a result, any of our competitors
  who join or have joined the DOCSIS intellectual property pool will have access
  to some aspects of our technology without being required to pay us any
  royalties or other compensation. If and when we submit S-CDMA to the DOCSIS
  Intellectual Property pool, we are in no way restricted from entering into
  royalty-bearing license agreements with companies that wish to use the S-CDMA
  technology for purposes other than implementing DOCSIS compatible products, or
  that do not wish to enter into the DOCSIS intellectual property pool. Further,
  some of our competitors have been successful in reverse engineering the
  technology of other companies, and the inclusion of S-CDMA in a future DOCSIS
  specification would expose some aspects of our technology to those competitors.
  DOCSIS specifications are available on an open basis once they are approved,
  not only to companies that are members of the DOCSIS IP Pool. If a competitor
  is able to duplicate the functionality and capabilities of our technology, we
  could lose all or some of the time-to-market advantage we might otherwise have.
  Under the terms of the proposed license agreement, if we sue certain parties to
  the proposed license agreement on claims of infringement of any copyright or
  patent right or misappropriation of any trade secret, those parties may
  terminate our license to the patents or copyrights they contributed to the
  DOCSIS intellectual property pool. If a termination like this were to occur, we
  would continue to have access to some aspects of the DOCSIS intellectual
  property pool, but we would not be able to develop products that fully comply
  with the DOCSIS cable modem specification. Also, even if we were to be removed
  from the IP pool, we would not be prevented from developing and selling
  products that fully comply with the DOCSIS specifications, but we would not be
  able to do this with the benefit of a royalty-free license, which would
  increase the cost of our products, assuming we were able to obtain a license
  agreement for the required technology. Because of these terms, we may find it
  difficult to enforce our intellectual property rights against certain
  companies, even in areas that are not directly related to DOCSIS specifications
  and products.
  
     We anticipate that developers of cable modems increasingly will be subject
  to infringement claims as the number of products and competitors in our
  industry segment grows. We have received letters from two individuals claiming
  that our technology infringes patents held by these individuals. We have
  reviewed the allegations made by these individuals and, after consulting with
  our patent counsel, we do not believe that our technology infringes any valid
  claim of these individuals' patents. If the issues are submitted to a court,
  the court could find that our products infringe these patents. In addition,
  these individuals may continue to assert infringement. If we are found to have
  infringed these individuals' patents, we could be subject to substantial
  damages and/or an injunction preventing us from conducting our business. In
  addition, other third parties may assert infringement claims against us in the
  future. An infringement claim, whether meritorious or not, could be time-
  consuming, result in costly litigation, cause product shipment delays or
  require us to enter into royalty or licensing agreements. These royalty or
  licensing agreements may not be available on terms acceptable to us or at all.
  Litigation also may be necessary to enforce our intellectual property rights.
  
     We pursue the registration of our trademarks in the United States and have
  applications pending to register several of our trademarks. However, the laws
  of certain foreign countries
  
                                         61
  might not protect our products or intellectual property rights to the same
  extent as the laws of the United States. This means that effective trademark,
  copyright, trade secret and patent protection might not be available in every
  country in which our products might be manufactured, marketed or sold.
  
  Our business is subject to communications industry regulations.
  
     Our business and our customers are subject to varying degrees of federal,
  state and local regulation. The jurisdiction of the Federal Communications
  Commission extends to the communications industry, including our broadband
  access products. The FCC has promulgated regulations that, among other things,
  set installation and equipment standards for communications systems. Although
  FCC regulations and other governmental regulations have not materially
  restricted our operations to date, future regulations applicable to our
  business or our customers could be adopted by the FCC or other regulatory
  bodies. For example, FCC regulatory policies affecting the availability of
  cable services and other terms on which cable companies conduct their business
  may impede our penetration of certain markets. In addition, regulation of cable
  television rates may affect the speed at which cable operators upgrade their
  cable infrastructures to two-way HFC. In addition, the increasing demand for
  communications systems has exerted pressure on regulatory bodies worldwide to
  adopt new standards for such products and services. This process generally
  involves extensive investigation of and deliberation over competing
  technologies. The delays inherent in this governmental approval process have in
  the past, and may in the future, cause the cancellation, postponement or
  rescheduling of the installation of communications systems by our customers.
  
     If other countries begin to regulate the cable modem industry more heavily
  or introduce standards or specifications with which our products do not comply,
  we will be unable to offer products in those countries until our products
  comply with those standards or specifications. In addition, we may have to
  incur substantial costs to comply with those standards or specifications. For
  instance, should the DAVIC standards for ATM-based digital video be established
  internationally, we will need to conform our cable modems to compete. Further,
  many countries do not have regulations for installation of cable modem systems
  or for upgrading existing cable network systems to accommodate our products.
  Whether we currently operate in a country without these regulations or enter
  into the market in a country these regulations do not exist, new regulations
  could be proposed at any time. The imposition of regulations like this could
  place limitations on a country's cable operators' ability to upgrade to support
  our products. Cable operators in these countries may not be able to comply with
  these regulations, and compliance with these regulations may require a long,
  costly process. For example, we experienced delays in product shipments to a
  customer in Brazil due to delays in certain regulatory approvals in Brazil.
  Similar delays could occur in other countries in which we market or plan to
  market our products. In addition, our customers in certain parts of Asia, such
  as Japan, are required to obtain licenses prior to selling our products, and
  delays in obtaining required licenses could harm our ability to sell products
  to these customers.
  
  Our business is subject to other regulatory approvals and certifications.
  
     In the United States, in addition to complying with FCC regulations, our
  products are required to meet certain safety requirements. For example, we are
  required to have our products certified by Underwriters Laboratory in order to
  meet federal requirements relating to electrical appliances to be used inside
  the home. Outside the United States, our products are subject to the regulatory
  requirements of each country in which the products are manufactured or sold.
  These requirements are likely to vary widely. We may be unable to obtain on a
  timely basis or at all the regulatory approvals that may be required for the
  
                                         62
  manufacture, marketing and sale of our products. In addition to regulatory
  compliance, some cable industry participants may require certification of
  compatibility.
  
  We are vulnerable to earthquakes and other natural disasters.
  
     The facility housing our corporate headquarters, the majority of our
  research and development activities and our in-house manufacturing operations
  is located in an area of California known for seismic activity. In addition,
  the operations of some of our key suppliers are also located in this area and
  in other areas know for seismic activity, such as Taiwan. An earthquake, or
  other significant natural disaster, could result in an interruption in our
  business or that of one or more of our key suppliers. Such an interruption
  could harm our operating results.
  
                                         63
  Signature
  
    Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.
  
                                      Terayon Communication Systems, Inc.
  
  Dated:  July 18, 2000                By: /s/ Ray M. Fritz
                                           ----------------------------
                                           Ray M. Fritz
                                           Chief Financial Officer
  
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