Washington, D.C. 20549

Delaware		77-0201147
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer: [   ]		Accelerated filer: [X]		Non-accelerated filer: [   ]		Smaller reporting company:[   ]
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The number of shares outstanding of the Registrant’s Common Stock, $.001 par value, was 95,013,945 on October 24, 2008.

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HARMONIC INC.

(In thousands, except par value amounts)		September 26, 2008				December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	169,593			$	129,005
Short-term investments			123,816				140,255
Accounts receivable, net of allowances of $7,894 and $8,194			75,949				69,302
Inventories			32,530				34,251
Deferred income taxes			26,964				3,506
Prepaid expenses and other current assets			11,692				17,489
Total current assets			440,544				393,808
Property and equipment, net			14,894				14,082
Goodwill			42,613				45,793
Intangibles, net			13,598				17,844
Other assets			27,971				4,252
Total assets		$	539,620			$	475,779
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	12,688			$	20,500
Income taxes payable			46				481
Deferred revenue			29,378				37,865
Accrued liabilities			40,589				51,686
Total current liabilities			82,701				110,532
Accrued excess facilities costs, long-term			6,584				9,907
Income taxes payable, long-term			40,773				8,908
Deferred taxes, long-term			—				3,454
Other non-current liabilities			8,511				8,565
Total liabilities			138,569				141,366
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.001 par value, 150,000 shares authorized; 94,998 and 93,772 shares issued and outstanding			95				94
Capital in excess of par value			2,263,679				2,246,875
Accumulated deficit			(1,861,603	)			(1,912,386	)
Accumulated other comprehensive loss			(1,120	)			(170	)
Total stockholders’ equity			401,051				334,413
Total liabilities and stockholders’ equity		$	539,620			$	475,779

The accompanying notes are an integral part of these consolidated financial statements.

HARMONIC INC.

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
(In thousands, except per share amounts)		2008				2007				2008				2007
Net sales		$	91,455			$	82,295			$	268,071			$	223,814
Cost of sales			47,259				46,652				138,744				130,454
Gross profit			44,196				35,643				129,327				93,360
Operating expenses:
Research and development			13,724				11,018				40,264				31,615
Selling, general and administrative			19,254				14,911				56,725				46,357
Write-off of acquired in-process technology			—				700				—				700
Amortization of intangibles			160				143				479				365
Total operating expenses			33,138				26,772				97,468				79,037
Income from operations			11,058				8,871				31,859				14,323
Interest income, net			2,286				1,238				7,548				3,224
Other income (expense), net			(1,450	)			58				(2,022	)			42
Income before income taxes			11,894				10,167				37,385				17,589
Provision for (benefit from) income taxes			(71	)			750				(13,398	)			807
Net income		$	11,965			$	9,417			$	50,783			$	16,782
Net income per share
Basic		$	0.13			$	0.12			$	0.54			$	0.21
Diluted		$	0.12			$	0.12			$	0.53			$	0.21
Weighted average shares
Basic			94,805				80,371				94,365				79,570
Diluted			95,863				81,642				95,491				80,743

The accompanying notes are an integral part of these consolidated financial statements.

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Nine Months Ended
		September 26,				September 28,
(In thousands)		2008				2007
Cash flows from operating activities:
Net income		$	50,783			$	16,782
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangibles			4,746				3,661
Write-off of acquired in-process technology			—				700
Depreciation			5,215				5,089
Stock-based compensation			5,470				4,475
Excess tax benefits from stock-based compensation			(2,864	)			—
Loss on impairment of investment			845				—
Net loss (gain) on disposal and impairment of fixed assets			22				(31	)
Deferred tax assets			(46,249	)			—
Other non-cash adjustments, net			(2,090	)			(386	)
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable, net			(6,612	)			(4,234	)
Inventories			1,741				5,777
Prepaid expenses and other assets			5,755				1,108
Accounts payable			(7,812	)			(18,217	)
Deferred revenue			(6,967	)			3,714
Income taxes payable			31,430				(271	)
Accrued excess facilities costs			(4,808	)			(5,661	)
Accrued and other liabilities			(9,939	)			(3,242	)
Net cash provided by operating activities			18,666				9,264
Cash flows from investing activities:
Purchases of investments			(91,868	)			(70,507	)
Proceeds from maturities and sales of investments			109,363				71,578
Acquisition of property and equipment			(6,049	)			(4,193	)
Acquisition of intellectual property			(500	)			—
Acquisition of Rhozet Corp, net of cash received			(2,828	)			(1,370	)
Redemption/(purchase) of Entone, Inc. convertible note			2,500				(2,500	)
Acquisition costs related to the merger of Entone Technologies, Inc.			—				(2,466	)
Net cash provided by (used in) investing activities			10,618				(9,458	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net			8,367				8,292
Excess tax benefits from stock-based compensation			2,864				—
Repayments under bank line and term loan			—				(460	)
Repayments of capital lease obligations			—				(65	)
Net cash provided by financing activities			11,231				7,767
Effect of exchange rate changes on cash and cash equivalents			73				(34	)
Net increase in cash and cash equivalents			40,588				7,539
Cash and cash equivalents at beginning of period			129,005				33,454
Cash and cash equivalents at end of period		$	169,593			$	40,993
Supplemental disclosure of cash flow information:
Income tax payments, net		$	1,527			$	1,132
Interest paid during the period		$	—			$	66
Non-cash investing and financing activities
Issuance of restricted common stock for Rhozet acquisition		$	—			$	8,424
Liability for future issuance of common stock for Rhozet acquisition		$	—			$	1,870

The accompanying notes are an integral part of these consolidated financial statements.

HARMONIC INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” the “Company” or “we”) considers necessary for a fair presentation of the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 17, 2008. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2008, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter which ends on December 31.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications. The Company has reclassified certain prior period balances to conform to the current year presentation. These reclassifications have no material impact on previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 157, “Fair Value Measurements” (“SFAS 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2 — “Effective Date of FASB Statement No. 157” delaying the effective date of SFAS No. 157 for one year for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

Harmonic adopted SFAS No. 157 on January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP FAS No. 157-2, and the adoption of SFAS 157 did not materially impact our financial condition, results of operations or cash flows. See Note 4, “Fair Value.”

In October 2008, the FASB issued FSP 157-3, “Determining Fair Value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition for the period covered by this quarterly report on Form 10-Q.

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December

15, 2008, and will be adopted by us in the first quarter of fiscal 2009. We are currently evaluating the potential impact, if any, of the adoption of SFAS 141(R) on our consolidated results of operations, financial condition or cash flows.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2009. We are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on our consolidated results of operations, financial condition or cash flows.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedge items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS 161 on our consolidated results of operations, financial condition or cash flows.

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS 162 to have a material effect on our consolidated results of operations and financial condition.

NOTE 3: RHOZET ACQUISITION

On July 31, 2007, Harmonic completed the acquisition of Rhozet Corporation, or Rhozet, a privately held company based in Santa Clara, California. Rhozet develops and markets software-based transcoding solutions that facilitate the creation of multi-format video for internet, mobile and broadcast applications. With Rhozet’s products, and sometimes in conjunction with other Harmonic products, Harmonic’s existing broadcast, cable, satellite and telco customers can deliver video programming over the internet and to mobile services, as well as expand the types of content delivered via their traditional networks to encompass web-based and user-generated content. Harmonic also believes that the acquisition opens up new customer opportunities for Harmonic with Rhozet’s customer base of broadcast content creators and online video service providers and is complementary to Harmonic’s video-on-demand networking software business acquired in December 2006 from Entone Technologies. These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Rhozet’s net tangible and intangible assets acquired resulting in the amount of goodwill we have recorded with this transaction. Management has made an allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed.

The purchase price of $16.2 million included $15.5 million of total merger consideration and $0.7 million of transaction expenses. Under the terms of the merger agreement, Harmonic paid or will pay an aggregate of approximately $15.5 million in total merger consideration, comprised of approximately $2.5 million in cash, approximately $10.3 million of common stock issued and to be issued, consisting of approximately 1.1 million shares of Harmonic’s common stock, in exchange for all of the outstanding shares of capital stock of Rhozet, and approximately $2.8 million of cash, which was paid in the first quarter of 2008, as provided in the merger agreement, to the holders of outstanding options to acquire Rhozet common stock. Pursuant to the merger agreement, approximately $2.3 million of the total merger consideration, consisting of cash and shares of Harmonic

common stock, is being held back by Harmonic for at least 18 months following the closing of the acquisition to satisfy certain indemnification obligations of Rhozet’s shareholders. As of September 26, 2008, approximately $2.3 million of purchase consideration, which based on the terms of the merger agreement will be settled through the issuance of approximately 0.2 million shares of Harmonic’s common stock and has been recorded as a long-term liability, and the payment of $0.5 million in cash which has been recorded as a current liability.

The Rhozet acquisition was accounted for under SFAS No. 141 and certain specified provisions of SFAS No. 142. The results of operations of Rhozet are included in Harmonic’s Consolidated Statements of Operations from July 31, 2007, the date of acquisition. The following table summarizes the allocation of the purchase price based on the fair value of the tangible assets acquired and the liabilities assumed at the date of acquisition:

(in thousands)
Cash acquired		$	657
Accounts receivable			457
Fixed assets			133
Other tangible assets acquired			59
Intangible assets:
IP technology			169
Software license			80
Existing technology			4,000
In-process technology			700
Core technology			1,100
Customer contracts			300
Maintenance agreements			600
Tradenames/trademarks			300
Goodwill			8,980
Total assets acquired			17,535
Deferred revenue			(174	)
Other accrued liabilities			(1,165	)
Net assets acquired		$	16,196

The purchase price was allocated as set forth in the table above. The “Income Approach” which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary method used in valuing the identified intangibles acquired. The Discounted Cash Flow method was used to estimate the fair value of the acquired existing technology, in-process technology, maintenance agreements and customer contracts. The Royalty Savings Method was used to estimate the fair value of the acquired core technology and trademarks/trade names. In the Royalty Savings Method, the value of an asset is estimated by capitalizing the royalties saved because the Company owns the asset. Expected cash flows were discounted at the Company’s weighted average cost of capital of 18%. Identified intangible assets, including existing technology and core technology are being amortized over their useful lives of four years; trade name/trademarks are being amortized over their useful lives of five years; customer contracts are being amortized over its useful life of six years and maintenance agreements are being amortized over its useful life of seven years. In-process technology was written off due to the risk that the developments will not be completed or competitive with comparable products. Existing technology is being amortized using the double declining method which reflects the future projected cash flows. The core technology, customer contracts, maintenance agreements and trade name/trademarks are being amortized using the straight-line method.

The residual purchase price of $9.0 million has been recorded as goodwill. The goodwill as a result of this acquisition is not expected to be deductible for tax purposes. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill relating to the acquisition of Rhozet is not being amortized and will be tested for impairment annually or whenever events indicate that an impairment may have occurred.

The following unaudited pro forma financial information presented below summarizes the combined results of operations as if the merger had been completed as of the beginning of January 1, 2007. The unaudited pro forma financial information for the three and nine months ended September 28, 2007 combines the results for Harmonic

for the three and nine months ended September 28, 2007, and the historical results of Rhozet for the one and seven months ended July 31, 2007. The pro forma financial information is presented for informational purposes only and does not purport to be indicative of what would have occurred had the merger actually been completed on such date or of results which may occur in the future.

		Three Months Ended				Nine Months Ended
(in thousands, except per share data)		September 28, 2007				September 28, 2007
Net sales		$	82,553			$	225,136
Net income		$	8,603			$	13,513
Net income per share — basic		$	0.11			$	0.17
Net income per share — diluted		$	0.10			$	0.17

NOTE 4: FAIR VALUE

In September 2006, FASB issued SFAS 157. This statement establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 as of January 1, 2008 and the impact was not significant.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize use of unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.
	•		Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s short-term investments primarily use broker quotes in a non-active market for valuation of these securities.
	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

In accordance with SFAS 157, the following table represents Harmonic’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 26, 2008:

(in thousands)		Level 1				Level 2				Level 3				Total
Money market funds		$	142,164			$	—			$	—			$	142,164
U.S. corporate debt			—				73,526				—				73,526
U.S. government agencies			—				35,925				—				35,925
Auction rate securities			—				—				14,365				14,365
		$	142,164			$	109,451			$	14,365			$	265,980
Forward exchange contracts			—				5,666				—				5,666
Total assets		$	142,164			$	115,117			$	14,365			$	271,646

Our auction rate securities were measured at fair value on a recurring basis using significant Level 3 inputs as of September 26, 2008. The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the nine month period ended September 26, 2008:

(in thousands)		Level 3
Balance as of December 31, 2007		$	—
Transfers in to Level 3			34,863
Sales			(8,130	)
Balance as of March 28, 2008			26,733
Sales			(12,289	)
Unrealized gain recorded in “Other comprehensive income”			64
Balance as of June 27, 2008			14,508
Unrealized loss recorded in “Other comprehensive income”			(143	)
Balance as of September 26, 2008		$	14,365

The fair value of our auction rate securities at September 26, 2008 were measured using Level 3 inputs. The inputs to the valuation model could no longer be valued by observable market data as of September 26, 2008, and as a result, these securities were classified as Level 3 of the fair value hierarchy under the framework of SFAS 157. Significant inputs to our valuation model for auction rate securities as of September 26, 2008 were based on certain assumptions, including interest rate yield curves, credit quality, the estimated time until liquidity returns to the auction rate securities and valuation estimates.

The following is a summary of available-for-sale securities:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
September 26, 2008
U.S. government debt securities		$	36,067			$	—			$	(142	)		$	35,925
Corporate debt securities			75,375				25				(1,874	)			73,526
Auction rate securities			14,365				—				—				14,365
Total		$	125,807			$	25			$	(2,016	)		$	123,816
December 31, 2007
U.S. government debt securities		$	15,886			$	13			$	(12	)		$	15,887
Corporate debt securities			90,247				68				(134	)			90,181
Auction rate securities			34,187				—				—				34,187
Total		$	140,320			$	81			$	(146	)		$	140,255

As of September 26, 2008, the fair value of certain of the Company’s short-term investments was less than their cost basis. These unrealized losses as a result of the decline in the fair value of such investments were primarily due to the current credit crisis in addition to changes in interest rates. Management reviewed various factors to determine the fair market value of our investments and whether to recognize an impairment charge related to these unrealized losses including, the current financial and credit market environment, the financial condition and near term prospects of the issuer of the short-term investment, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. Based on this analysis, the Company determined that a portion of the unrealized losses associated with the Company’s portfolio of short-term investments were other-than-temporary and recorded an impairment charge for one security of $0.8 million for the three month period ended September 26, 2008, which is included in other income (expense), net, in the accompanying condensed consolidated statements of operations. The impairment charge recognized during the three-month period ended September 26, 2008 relates to a marketable security issued by Lehman Brothers Holdings, Inc., which filed for bankruptcy in September 2008. The Company determined that the remaining unrealized losses are temporary in nature and recorded them as a component of accumulated other comprehensive loss.

As of September 26, 2008, we held approximately $14.4 million of auction rate securities, or ARSs, classified as short-term investments and we believe the fair value of these securities approximate their par value at the balance sheet date. These ARSs, which are invested in preferred securities in closed end funds, all have a credit rating of AA or better and the issuers are paying interest at the maximum contractual rate. During the first nine months of 2008, the Company was able to sell $20.4 million of auction rate securities through successful auctions and redemptions. The remaining $14.4 million in ARSs held by the Company as of September 26, 2008 all had failed auctions in the first nine months of 2008. Based on current market conditions, we believe that it is likely that future auctions related to these securities will be unsuccessful in the near term. Unsuccessful auctions will result in our holding these securities beyond their next scheduled auction reset dates, thus limiting the short-term liquidity of these investments. While these failures in the auction process have affected our ability to access these funds in the near term, we do not believe that the underlying securities or collateral have been affected. It is the Company’s intent to realize the cash value of these securities during its normal operating cycle and accordingly the securities have been classified in short-term investments. During August 2008, we received notification from our investment manager who holds the ARSs that it had reached a settlement with certain regulatory authorities, pursuant to which the Company would be able to sell its outstanding ARSs to the investment manager at par, plus accrued interest and dividends at any time during the period from January 2, 2009 through January 15, 2010. While management believes that the Company will be able to liquidate our auction rate securities without significant loss during its normal annual operating cycle, the timing to realize the investments’ recorded value is uncertain. If the credit rating of the security issuers deteriorates or does not meet our investment criteria, the Company may be required to adjust the carrying value of these investments through an impairment charge or dispose of these securities, possibly at a loss.

Impairment of Investments

We monitor our investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the current financial and credit market environment, the financial condition and near term prospects of the issuer of the investment, the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in our industry; our relative competitive position within the industry; and our intent and ability to retain the investment for a period of time sufficient to allow any anticipated recovery in fair value.

In the third quarter of 2008, we recorded an impairment of $0.8 million in other expense on an investment in the unsecured debt of Lehman Brothers Holdings, Inc., which filed for bankruptcy in September 2008.

In accordance with FASB Staff Position Nos. 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1”), there is one available-for-sale security with a total fair market value at September 26, 2008 of $0.4 million that has been in a continuous unrealized loss position for more than 12 months, however the amount of unrealized losses on that security is insignificant as of September 26, 2008. The decline in the estimated fair value of the Company’s these investments relative to amortized cost is primarily related to changes in interest rates and is considered to be temporary in nature.

NOTE 5: INVENTORIES

		September 26,				December 31,
(In Thousands)		2008				2007
Raw materials		$	8,192			$	8,700
Work-in-process			2,315				1,574
Finished goods			22,023				23,977
		$	32,530			$	34,251

NOTE 6: GOODWILL AND IDENTIFIED INTANGIBLES

The following is a summary of goodwill and intangible assets as of September 26, 2008 and December 31, 2007:

		September 26, 2008												December 31, 2007
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In Thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Identified intangibles:
Developed core technology		$	49,745			$	(38,934	)		$	10,811			$	49,463			$	(34,941	)		$	14,522
Customer relationships/contracts			33,908				(32,479	)			1,429				33,912				(32,234	)			1,678
Trademark and tradename			5,312				(4,572	)			740				5,337				(4,432	)			905
Supply agreement			3,501				(3,501	)			—				3,543				(3,543	)			—
Maintenance agreements			600				(100	)			500				600				(36	)			564
Software license, intellectual property and assembled workforce			309				(191	)			118				249				(74	)			175
Subtotal of identified intangibles			93,375				(79,777	)			13,598				93,104				(75,260	)			17,844
Goodwill			42,613				—				42,613				45,793				—				45,793
Total goodwill and other intangibles		$	135,988			$	(79,777	)		$	56,211			$	138,897			$	(75,260	)		$	63,637

The changes in the carrying amount of goodwill for the nine months ended September 26, 2008 are as follows:

(In Thousands)		Goodwill
Balance as of December 31, 2007		$	45,793
Deferred tax asset adjustment			(2,960	)
Foreign currency translation adjustments			(220	)
Balance as of September 26, 2008		$	42,613

During the second quarter of 2008 an adjustment to goodwill of $3.0 million was recorded due to an adjustment of the tax valuation allowance from the Entone and Rhozet acquisitions.

During the third quarter of 2008, the Company purchased certain assets, including intellectual property for $0.5 million in cash. This intellectual property will be utilized in furthering the capabilities of the Company’s IP-based video solutions over cable network infrastructures. The purchase price was allocated between developed technology and assembled workforce and both have a useful life of 2.5 years.

For the three and nine months ended September 26, 2008, the Company recorded a total of $1.5 million and $4.6 million of amortization expense for identified intangibles, of which $1.4 million and $4.2 million was included in cost of sales, respectively. For the three and nine months ended September 28, 2007, the Company recorded a total of $1.5 million and $3.7 million of amortization expense for identified intangibles, of which $1.3 million and $3.3 million was included in cost of sales, respectively. The estimated future amortization expense of purchased intangible assets with definite lives is as follows:

(In Thousands)

Years Ending December 31,		Amounts
2008 (remaining 3 months)		$	1,529
2009			6,012
2010			4,641
2011			815
2012			437
2013			115
2014			49
Total		$	13,598

NOTE 7: RESTRUCTURING AND EXCESS FACILITIES

In 2001 and 2002, excess facilities charges totaling $44.3 million were recorded due to the Company’s reduced headcount, difficult business conditions and a weak local commercial real estate market.

In the fourth quarter of 2005, the excess facilities liability was decreased by $1.1 million due to subleasing a portion of an unoccupied building for the remainder of the lease. During the third quarter of 2006, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $3.9 million. In addition, during the third quarter of 2006 the Company revised its estimate of expected sublease income with respect to previously vacated facilities and recorded a credit of $1.7 million.

In the third quarter of 2007, the Company recorded a credit of $1.8 million in selling, general and administrative expenses from a revised estimate of expected sublease income due to the extension of a sublease of a Sunnyvale building to the lease expiration. In addition, in 2007 the Company recorded a restructuring charge of $0.4 million on a reduction in estimated sublease income for a Sunnyvale building.

During the first quarter of 2007, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $0.4 million. This charge primarily relates to two buildings in the UK which were vacated in connection with the closure of the manufacturing and research and development activities of Broadcast Technology Limited, or BTL, in accordance with applicable provisions of FAS No. 146. In the fourth quarter of 2007, the Company recorded a charge in selling, general and administrative expenses of $0.1 million for the remaining building from the closure of BTL.

During the second quarter of 2008, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $1.2 million from a revised estimate of expected sublease income of a Sunnyvale building. The lease terminates in September 2010 and all sublease income has been eliminated from the estimated liability.

During the third quarter of 2008, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $0.2 million from a revised estimate of expected sublease income of two buildings in England. The leases terminate in October 2010 and all sublease income has been eliminated from the estimated liability.

As of September 26, 2008, accrued excess facilities cost totaled $12.9 million, of which $6.4 million was included in current accrued liabilities and $6.5 million in other non-current liabilities. The Company incurred cash outlays of $4.8 million during the first nine months of 2008 principally for lease payments, property taxes, insurance and other maintenance fees related to vacated facilities. Harmonic expects to pay approximately $1.3 million of excess facility lease costs, net of estimated sublease income, for the remainder of 2008 and to pay the remaining $11.6 million, net of estimated sublease income, over the remaining lease terms through October 2010.

Harmonic reassesses this liability quarterly and adjusts as necessary based on changes in the timing and amounts of expected sublease rental income.

The following table summarizes restructuring activities:

		Excess				Campus				BTL
(In Thousands)		Facilities				Consolidation				Closure				Total
Balance at December 31, 2007		$	11,150			$	4,493			$	370			$	16,013
Provisions/(recoveries)			(10	)			1,463				263				1,716
Cash payments, net of sublease income			(2,949	)			(1,639	)			(197	)			(4,785	)
Balance at September 26, 2008		$	8,191			$	4,317			$	436			$	12,944

NOTE 8: CREDIT FACILITIES AND LONG-TERM DEBT

Harmonic has a bank line of credit facility with Silicon Valley Bank, which provides for borrowings of up to $10.0 million that matures on March 4, 2009. As of September 26, 2008, other than standby letters of credit and guarantees (Note 15), there were no amounts outstanding under the line of credit facility and there were no borrowings in 2007 or 2008. This facility, which was amended and restated in March 2008, contains a financial covenant with the requirement for Harmonic to maintain cash, cash equivalents and short-term investments, net of credit extensions, of not less than $40.0 million. If Harmonic is unable to maintain this cash, cash equivalents and short-term investments balance or satisfy the affirmative covenant requirement, Harmonic would be in noncompliance with the facility. In the event of noncompliance by Harmonic with the covenant under the facility, Silicon Valley Bank would be entitled to exercise its remedies under the facility which include declaring all obligations immediately due and payable if obligations were not repaid. At September 26, 2008, Harmonic was in compliance with the covenant under this line of credit facility. The March 2008 amendment requires payment of approximately $20,000 of additional fees if the Company does not maintain an unrestricted deposit of $30.0 million with the bank for 10 consecutive days. Future borrowings pursuant to the line bear interest at the bank’s prime rate (5.0% at September 26, 2008). Borrowings are payable monthly and are not collateralized.

NOTE 9: BENEFIT PLANS

Stock Option Plans. Harmonic has reserved 17,554,000 shares of Common Stock for issuance under various employee stock option plans, which includes an amendment to the 1995 Plan approved by Harmonic’s stockholders in May 2008 and increased the number of shares of common stock reserved for issuance under this plan by 7,500,000. The options are granted for periods not exceeding ten years and generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. Stock options are granted at the fair market value of the stock at the date of grant. Beginning on February 27, 2006, option grants had a term of seven years. Certain option awards provide for accelerated vesting if there is a change in control.

Director Option Plans. In May 2002, Harmonic’s stockholders approved the 2002 Director Stock Plan (the “Plan”), replacing the 1995 Director Option Plan. In June 2006, Harmonic’s stockholders approved an amendment to the Plan and increased the maximum number of shares of common stock authorized for issuance over the term of the Plan by an additional 300,000 shares to 700,000 shares and reduced the term of future options granted under the Plan to seven years. In May 2008, Harmonic stockholders approved amendments to the Plan and increased the maximum number of shares of common stock authorized for issuance by an additional 100,000 shares to 800,000 shares. Harmonic has a total of 667,000 shares of Common Stock reserved for issuance under the Plan. The Plan provides for the grant of non-statutory stock options or restricted stock units to certain non-employee directors of Harmonic. Restricted stock units, or RSUs, are granted at fair market value of the stock at the date of grant and vest after one year. Stock options are granted at fair market value of the stock at the date of grant for periods not exceeding ten years. Initial option grants generally vest monthly over three years, and subsequent grants generally vest monthly over one year. In the third quarter of 2008, each non-employee director received restricted stock units valued at $80,000 on July 31, 2008, which will vest on May 15, 2009.

The following table summarizes activities under the Plans:

						Outstanding Options
		Shares Available				Number				Weighted Average
(In thousands except exercise price)		for Grant				of Shares				Exercise Price
Balance at December 31, 2007			2,051				9,469			$	11.31
Shares authorized			7,600				—				—
Restricted stock units granted			(144	)			—				—
Options granted			(2,861	)			2,861				8.21
Options exercised			—				(757	)			6.17
Options canceled			701				(701	)			14.02
Options expired			—				(70	)			25.66
Balance at September 26, 2008			7,347				10,802			$	10.58
Options vested and exercisable as of September 26, 2008							5,717			$	12.85
Options vested and expected-to-vest as of September 26, 2008							10,417			$	10.67

The weighted-average fair value of options granted for the nine months ended September 26, 2008 was $3.79.

The following table summarizes information regarding stock options outstanding at September 26, 2008:

				Stock Options Outstanding												Stock Options Exercisable
								Weighted-
				Number				Average								Number
				Outstanding at				Remaining								Exercisable at				Weighted
Range of Exercise				September 26,				Contractual Life				Weighted-Average				September 26,				Average
Prices				2008				(Years)				Exercise Price				2008				Exercise Price
(In thousands, except exercise price and life)
$	0.19 -- 5.86				1,355				5.4			$	4.68				1,103			$	4.63
	5.87 -- 7.60				1,165				4.5				6.05				772				6.06
	7.67 -- 8.17				2,739				6.6				8.16				67				8.00
	8.20 -- 8.93				2,375				5.4				8.37				1,077				8.50
	8.95 -- 11.33				1,972				3.9				9.76				1,502				9.68
	11.45 -- 22.34				117				2.7				13.51				117				13.52
	22.78 -- 121.68				1,079				1.5				35.08				1,079				35.08
					10,802				4.9			$	10.58				5,717			$	12.85

The weighted-average remaining contractual life for all exercisable stock options at September 26, 2008 was 3.8 years. The weighted-average remaining contractual life of all vested and expected-to-vest stock options at September 26, 2008 was 4.8 years.

Aggregate pre-tax intrinsic value of options exercisable at September 26, 2008 was $6.9 million. The aggregate intrinsic value of stock options vested and expected-to-vest net of estimated forfeitures was $10.9 million at September 26, 2008. Aggregate pre-tax intrinsic value represents the difference between our closing price on the last trading day of the fiscal period, which was $8.73 as of September 26, 2008, and the exercise price multiplied by the number of options outstanding or exercisable. The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the current market value at the time of exercise. The aggregate intrinsic value of exercised stock options was $0.9 million and $2.3 million during the three and nine months ended September 26, 2008, respectively.

Shares of RSUs granted have been deducted from the shares available for grant under the Company’s stock option plans using a factor of two times the number of RSUs granted. Outstanding RSU balances were not included in the outstanding options balances in the above table. A summary of the Company’s RSU activity and related information for the three months ended September 26, 2008 is set forth in the following table:

						Weighted Average
		Number of				Grant Date Fair				Aggregate
(In thousands except exercise price)		Shares				Value				Intrinsic Value
Balance at June 27, 2008			—			$	—
Restricted stock units granted			72				7.79
Restricted stock units vested			—				—
Restricted stock units cancelled			—				—
Balance at September 26, 2008			72			$	7.79			$	628

Employee Stock Purchase Plan. In May 2002, Harmonic’s stockholders approved the 2002 Employee Stock Purchase Plan (the “2002 Purchase Plan”) replacing the 1995 Employee Stock Purchase Plan effective for the offering period beginning on July 1, 2002. In May 2004, Harmonic’s stockholders approved an amendment to the 2002 Purchase Plan and increased the maximum number of shares of common stock authorized for issuance over the term of the 2002 Purchase Plan by an additional 2,000,000 shares. In June 2006, Harmonic’s stockholders approved an amendment to the 2002 Purchase Plan to increase the maximum number of shares of common stock available for issuance under the 2002 Purchase Plan by an additional 2,000,000 shares to 5,500,000 shares and reduce the term of future offering periods to six months, which became effective for the offering period beginning January 1, 2007. The 2002 Purchase Plan enables employees to purchase shares at 85% of the fair market value of the Common Stock at the beginning of the offering period or end of the purchase period, whichever is lower. Offering periods and purchase periods generally begin on the first trading day on or after January 1 and July 1 of each year. The 2002 Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During the first nine months of 2008 and 2007, the number of shares of stock issued under the purchase plans were 468,545 and 669,871 shares at weighted average prices of $7.88 and $4.82, respectively. The weighted-average fair value of each right to purchase shares of common stock granted under the purchase plans were $2.86 and $2.38 for the first nine months of 2008 and 2007, respectively. At September 26, 2008, 1,345,079 shares were reserved for future issuances under the 2002 Purchase Plan.

Retirement/Savings Plan. Harmonic has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to 20% of total compensation, subject to applicable Internal Revenue Service limitations. Harmonic makes discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants up to a maximum contribution per participant of $1,000 per year. Such amounts totaled $0.1 million and $0.3 million in the three and nine months periods ended September 26, 2008.

Stock-based Compensation

The following table summarizes stock-based compensation costs on our Condensed Consolidated Statements of Operations for the three and nine months ended September 26, 2008 and September 28, 2007:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
(In Thousands)		2008				2007				2008				2007
Employee stock-based compensation in:
Cost of sales		$	325			$	255			$	819			$	719
Research and development expense			785				563				2,021				1,438
Sales, general and administrative expense			1,110				822				2,630				1,979
Total employee stock-based compensation in operating expense			1,895				1,385				4,651				3,417
Total employee stock-based compensation			2,220				1,640				5,470				4,136
Amount capitalized as inventory			10				(5	)			16				9
Total other stock-based compensation(1)			—				48				—				339
Total stock-based compensation		$	2,230			$	1,683			$	5,486			$	4,484

The fair value of each option grant is estimated on the date of grant using the Black-Scholes multiple option pricing model with the following weighted average assumptions:

		Employee Stock Options
		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Expected life (years)			4.75				4.75				4.75				4.75
Volatility			52	%			56	%			51	%			59	%
Risk-free interest rate			3.3	%			4.6	%			3.1	%			4.7	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

		Employee Stock Purchase Plan
		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Expected life (years)			0.5				0.5				0.5				0.5
Volatility			46	%			50	%			46	%			51	%
Risk-free interest rate			2.1	%			4.9	%			2.3	%			4.9	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

The expected term for stock options and the 2002 Purchase Plan represents the weighted-average period that the stock options are expected to remain outstanding. Our computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

We use the historical volatility over the expected term of the options and the 2002 Purchase Plan offering period to estimate the expected volatility. We believe that the historical volatility, at this time, represents fairly the future volatility of its common stock. We will continue to monitor relevant information to measure expected volatility for future option grants and 2002 Purchase Plan offering periods.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on our history and expectation of dividend payouts.

NOTE 10: INCOME TAXES

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter’s year-to-date pre-tax income. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company’s ability to use tax credits and net operating loss carryforwards, the current year accrual for unrecognized tax benefits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, changes in liabilities for previous years uncertain tax positions and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated effective annual income tax rate.

For the nine months ended September 26, 2008, our tax rate benefit, which includes discrete items, was 35.8% compared to a tax provision of 4.6% for the same period a year ago. The 35.8% tax rate benefit for the nine months ended is comprised of discrete items of 41.4%, primarily due to our discrete valuation allowance release and an underlying effective tax rate of 5.6%. The difference between the underlying effective tax rate for the nine months ended September 26, 2008 and the federal statutory rate of 35% is primarily attributable to charges due to the

differential in foreign tax rates, intercompany license payment and non-deductible SFAS 123(R) stock compensation expense, offset by benefits due to the utilization of net operating loss carryforwards, alternative minimum tax credits, research tax credits and the release of the valuation allowance attributable to current year income.

On October 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008, which reinstated the federal research tax credit and is effective retroactively to January 1, 2008. The effect of the reinstatement of this tax credit will be recorded in the fourth quarter of 2008.

In accordance with SFAS 109, we have evaluated the need for a valuation allowance based on historical evidence, trends in profitability, expectations of future taxable income and implemented tax planning strategies. In the second quarter of 2008 the company determined that a valuation allowance was no longer necessary for a portion of its net deferred tax assets because based on the available evidence it determined that realization of these net deferred tax assets was more likely than not. In addition, SFAS 109 requires that the portion of the valuation allowance release that is based on income projections in future years be recorded as a discrete item. In the first nine months of 2008 our discrete valuation release totaled $19.0 million, of which $16.1 million was recorded as a benefit to the provision for income taxes and $2.9 million as a reduction to goodwill. In addition, during the first nine months of 2008 an adjustment of $2.9 million was recorded to Additional Paid in Capital due to the realization of excess tax benefits from stock-based compensation.

In compliance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48”), the Company had gross unrecognized tax benefits, which exclude interest and penalties of approximately $12.1 million as of December 31, 2007, and approximately $43.2 million as of September 26, 2008. We anticipate the unrecognized tax benefits to increase by approximately $2 million to $6 million in the next 12 months.

We record interest and penalties related to uncertain tax positions in income tax expense. During the third quarter and first nine months ended September 26, 2008, we recorded $0.2 million and $0.6 million, respectively, for interest and penalties related to uncertain tax positions resulting in a balance at September 26, 2008 of $3.7 million.

The tax years 2001-2007 remain open to examination by various federal, state and foreign taxing jurisdictions to which we are subject.

NOTE 11: NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income attributable to common stockholders for the period by the weighted average number of the common shares outstanding during the period.

The following table shows the potentially dilutive shares, consisting of options, for the periods presented that were excluded from the net income computations because their effect was antidilutive:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Potentially dilutive options outstanding			8,790				5,464				9,249				7,196

Following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Net income (numerator)		$	11,965			$	9,417			$	50,783			$	16,782
Shares calculation (denominator):
Weighted average shares outstanding — basic			94,805				80,371				94,365				79,570
Effect of dilutive securities:
Future issued common stock related to acquisitions			201				132				201				44
Potential common stock relating to stock options, restricted stock units and ESPP			857				1,139				925				1,129
Average shares outstanding — diluted			95,863				81,642				95,491				80,743
Net income per share — basic		$	0.13			$	0.12			$	0.54			$	0.21
Net income per share — diluted		$	0.12			$	0.12			$	0.53			$	0.21

NOTE 12: COMPREHENSIVE INCOME

The Company’s total comprehensive income was as follows:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Net income		$	11,965			$	9,417			$	50,783			$	16,782
Change in unrealized gain (loss) on investments, net			(1,024	)			92				(1,194	)			71
Foreign currency translation			84				(11	)			245				(78	)
Total comprehensive income		$	11,025			$	9,498			$	49,834			$	16,775

NOTE 13: SEGMENT INFORMATION

We operate our business in one reportable segment, which is the design, manufacture and sales of products and systems that enable network operators to efficiently deliver broadcast and on-demand video services that include digital audio, video-on-demand and high definition television as well as high-speed internet access and telephony. Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. Our chief operating decision maker is our Chief Executive Officer.

Our revenue by geographic region, based on the location at which each sale originates, is summarized as follows:

Geographic Information:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Net sales:
United States		$	55,669			$	44,638			$	153,565			$	125,447
International			35,786				37,657				114,506				98,367
Total		$	91,455			$	82,295			$	268,071			$	223,814

For the three months ended September 26, 2008, sales to Comcast and EchoStar accounted for 24% and 10% of net sales, respectively. For the nine months ended September 26, 2008, sales to Comcast and EchoStar accounted for 20% and 12% of net sales, respectively. For the three months ended September 28, 2007, sales to Comcast and EchoStar accounted for 16% and 15% of net sales, respectively. For the nine months ended September 28, 2007, sales to Comcast accounted for 18% of net sales. As of September 26, 2008, two customers had a balance of 27% and 13% of our net accounts receivable.

The Company’s assets are primarily located within the United States of America.

NOTE 14: RELATED PARTY

A director of Harmonic is also a director of JDS Uniphase Corporation, from whom the Company purchases products used in the manufacture of our products. Product purchases from JDS Uniphase were approximately $0.3 million and $0.6 million for the three and nine months ended September 26, 2008, respectively. As of September 26, 2008, Harmonic had liabilities to JDS Uniphase of an insignificant amount.

NOTE 15: GUARANTEES

Warranties. The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and adjusts based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of specified warranty claims. Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarized below:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Balance at beginning of the period		$	5,634			$	6,056			$	5,786			$	6,061
Accrual for current period warranties.			937				1,120				2,703				2,700
Adjustments for preexisting warranties			556				(148	)			1,142				274
Warranty costs incurred			(1,431	)			(1,208	)			(3,935	)			(3,215	)
Balance at end of the period		$	5,696			$	5,820			$	5,696			$	5,820

Standby Letters of Credit. As of September 26, 2008, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related to performance bonds. The maximum amount of potential future payments under these arrangements was $0.3 million.

Indemnification. Harmonic is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no claims against us for indemnification pursuant to any of these arrangements and, accordingly, no amounts have been accrued in respect of the indemnification provisions through September 26, 2008.

Guarantees. As of September 26, 2008, Harmonic had no other guarantees outstanding.

NOTE 16: LEGAL PROCEEDINGS

In 2000, several actions alleging violations of the federal securities laws by Harmonic and certain of its officers and directors (some of whom are no longer with Harmonic) were filed in or removed to the United States District Court (the “District Court”) for the Northern District of California. The actions subsequently were consolidated.

A consolidated complaint, filed on December 7, 2000, was brought on behalf of a purported class of persons who purchased Harmonic’s publicly traded securities between January 19, 2000 and June 26, 2000. The complaint also

alleged claims on behalf of a purported subclass of persons who purchased C-Cube securities between January 19, 2000 and May 3, 2000. In addition to Harmonic and certain of its officers and directors, the complaint also named C-Cube Microsystems Inc. and several of its officers and directors as defendants. The complaint alleged that, by making false or misleading statements regarding Harmonic’s prospects and customers and its acquisition of C-Cube, certain defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The complaint also alleged that certain defendants violated section 14(a) of the Exchange Act and sections 11, 12(a)(2), and 15 of the Securities Act of 1933, or the Securities Act, by filing a false or misleading registration statement, prospectus, and joint proxy in connection with the C-Cube acquisition.

Following a series of procedural actions at the District Court and at the United States Court of Appeals for the Ninth Circuit, a significant number of the claims alleged in the plaintiffs’ amended complaint were dismissed, including all claims against C-Cube and its officers and directors. However, certain of the plaintiffs’ claims survived dismissal. In January 2007, the District Court set a trial date for August 2008, and also ordered the parties to participate in mediation.

A derivative action purporting to be on our behalf was filed in the Superior Court for the County of Santa Clara against certain current and former officers and directors on May 15, 2003. It alleges facts similar to those alleged in the securities class action and names Harmonic as a nominal defendant. The action remains pending with no trial date set.

As a result of discussions and negotiations between plaintiffs’ counsel and Harmonic, and Harmonic and its insurance carriers, an agreement was reached in March 2008 to resolve the securities class action lawsuit. This agreement releases Harmonic, its officers, directors and insurance carriers from all claims brought in the lawsuit by the plaintiffs against Harmonic or its officers and directors, without any admission of fault on the part of Harmonic or its officers and directors. On October 29, 2008, the District Court issued a final order granting approval of the settlement agreement.

In the derivative action, recent discussions between the plaintiffs’ counsel and Harmonic have resulted in a tentative settlement which will require no payments by the Company or its officers and directors. If finalized, this tentative agreement will release Harmonic’s officers and directors from all claims brought in the derivative lawsuit. This tentative agreement remains subject to certain contingencies, including negotiation and execution by the parties of a written settlement agreement, and final approval by the District Court. A hearing to grant final approval is scheduled for December 19, 2008.

Under the terms of the agreement to settle the securities class action lawsuit, Harmonic and its insurance carriers will pay $15.0 million in consideration to the plaintiffs in the securities class action. Of this amount, Harmonic will pay $5.0 million, and Harmonic’s insurance carriers, in addition to having funded most litigation costs, will contribute the remaining $10.0 million on behalf of the individual defendants. The plaintiffs’ lawyers have applied for an award of fees and costs in an unspecified amount to be paid from the $15.0 million in consideration and subject to the approval of the District Court. In addition, Harmonic estimates that it has paid or will pay approximately $1.4 million in related legal fees and expenses in connection with proceedings in the securities class action and derivative lawsuits. The Company recorded a provision of $6.4 million in its selling, general and administrative expenses in the year ended December 31, 2007. Harmonic paid its share of the settlement consideration into escrow on August 5, 2008. As of September 26, 2008, we had $0.6 million recorded in accrued liabilities for the settlement of remaining obligations.

On July 3, 2003, Stanford University and Litton Systems filed a complaint in U.S. District Court for the Central District of California alleging that optical fiber amplifiers incorporated into certain of Harmonic’s products infringe U.S. Patent No. 4859016. This patent expired in September 2003. The complaint sought injunctive relief, royalties and damages. On August 6, 2007, the District Court granted our motion to dismiss. The plaintiffs appealed this motion and on June 19, 2008 the U.S. Court of Appeals for the Federal Circuit issued a decision which vacated the District Court’s decision and remanded for further proceedings. At a scheduling conference on October 6, 2008 the judge ordered the parties to mediation. A mediation session is scheduled for November 4, 2008. An unfavorable outcome on any of these litigation matters could require that Harmonic pay substantial damages, or, in connection with any intellectual property infringement claims, could require that we pay ongoing royalty payments or could prevent us from selling certain of our products. A settlement or an unfavorable outcome on these or any other

litigation matters could have a material adverse effect on Harmonic’s business, operating results, financial position or cash flows.

Harmonic is involved in other litigation and may be subject to claims arising in the normal course of business. In the opinion of management the amount of ultimate liability with respect to these matters in the aggregate will not have a material adverse effect on the Company or its operating results, financial position or cash flows.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements related to:

•		Our expectation that customer concentration will continue for the foreseeable future;
•		Our expectation that international sales will continue to account for a significant portion of our net sales for the foreseeable future;
•		Our expectation that we will experience a substantial increase in our effective tax rate in 2009 and future years;
•		Our expectation that auctions for our auction rate securities held by us will be unsuccessful in the near term;
•		Our belief that we will be able to liquidate auction rate securities held by us without significant loss;
•		Our belief that adverse economic conditions and tight credit markets may reduce capital spending by our customers, which could have a material and adverse affect on sales of our products;
•		Our expectation that we will record a total of approximately $1.3 million in amortization of intangibles expense in cost of sales in the remaining three months of 2008;
•		Our expectation that we will record a total of approximately $0.2 million in amortization of intangibles expense in operating expenses in the remaining three months of 2008;
•		Our expectation that our capital expenditures will be in the range of $7 million to $8 million during 2008;
•		Our belief that the net proceeds from our recently completed public offering of common stock will be used for general corporate purposes, including payment of existing liabilities, research and development, the development or acquisition of new products or technologies, equipment acquisitions, strategic acquisitions of businesses, general working capital and operating expenses;
•		Our belief that our existing liquidity sources, including our bank line of credit facility, will satisfy our requirements for at least the next twelve months;
•		Our belief that near-term changes in exchange rates will not have a material impact on our operating results, financial position and liquidity;
•		Our expectation that sales to cable television, satellite and telecommunications operators will constitute a significant portion of net sales for the foreseeable future;
•		Our expectation regarding the ultimate settlement or resolution of outstanding litigation;
•		Our expectation that we will make acquisitions in the future;
•		Our expectation that our operations will be affected by new environmental laws and regulations on an ongoing basis;
•		Our expectation that an increasing percentage of our consolidated, pre-tax income will be derived from and reinvested in our international operations and our expectations regarding the associated tax rates;

•		Our expectation that any ultimate liability of Harmonic with respect to certain litigation arising in the normal course of business will not, in the aggregate, have a material adverse effect on us or our operating results, financial position or cash flows; and
•		Our expectation that operating results are likely to fluctuate in the future.

These statements involve risks and uncertainties as well as assumptions that, if they were to never materialize or prove incorrect, could cause actual results to differ materially from those projected, expressed or implied in the forward-looking statements. These risks and uncertainties include those set forth under “Risk Factors” below and elsewhere in this Quarterly Report on Form 10-Q and that are otherwise described from time to time in Harmonic’s filings with the Securities and Exchange Commission. We undertake no obligation to update or correct these forward-looking statements.

Overview

Harmonic designs, manufactures and sells versatile and high performance video products and system solutions that enable service providers to efficiently deliver the next generation of broadcast and on-demand services, including high-definition television, or HDTV, video-on-demand, or VOD, network personal video recording and time-shifted TV. Historically, the majority of our sales have been derived from sales of video processing solutions and edge and access systems to cable television operators and from sales of video processing solutions to direct-to-home satellite operators. We also provide our video processing solutions to telecommunications companies, or telcos, broadcasters and Internet companies that offer video services to their customers.

In the third quarter and first nine months of 2008, Harmonic had net sales of $91.5 million and $268.1 million, respectively, which represented increases of 11% and 20%, respectively, in each period, compared to the third quarter and first nine months of 2007. The increase in sales in the third quarter of 2008 compared to the corresponding periods in 2007 was primarily due to stronger demand from our domestic satellite and cable customers for products and solutions related to VOD and HDTV. The increase in sales in the first nine months of 2008 compared to the corresponding periods in 2007 was primarily due to stronger demand from our domestic and international satellite and cable customers for products and solutions related to VOD and HDTV, and sales to new customers worldwide. Gross margins increased in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 due to favorable margins from lower average product costs due to increased manufacturing volumes and product design innovations and lower expenses for excess and obsolete inventories.

Historically, a majority of our net sales have been to relatively few customers, and due in part to the consolidation of ownership of cable television and direct broadcast satellite systems, and we expect this customer concentration to continue for the foreseeable future. In the third quarter of 2008 sales to Comcast and EchoStar accounted for 24% and 10% of net sales, respectively. In the third quarter of 2007, sales to Comcast and EchoStar accounted for 16% and 15% of net sales, respectively. In the first nine months of 2008, sales to Comcast and EchoStar accounted for 20% and 12% of net sales, respectively. In the first nine months of 2007, sales to Comcast accounted for 18% of net sales.

Sales to customers outside of the U.S. in the third quarter and first nine months of 2008 represented 39% and 43% of net sales, respectively, compared to 46% and 44% for the comparable periods in 2007. A significant portion of our international sales are made to distributors and system integrators, which are generally responsible for importing the products and providing installation and technical support and service to customers within their territory. Sales denominated in foreign currencies were approximately 5% of net sales in the first nine months of 2008 compared to 7% for the comparable period of 2007. We expect international sales to continue to account for a significant portion of our net sales for the foreseeable future.

Harmonic historically has recognized a significant portion, or the majority, of its revenues in the last month of the quarter. Harmonic establishes its expenditure levels for product development and other operating expenses based on projected sales levels, and expenses are relatively fixed in the short term. Accordingly, variations in timing of sales can cause significant fluctuations in operating results. Harmonic’s expenses for any given quarter are typically based on expected sales and if sales are below expectations, our operating results may be adversely impacted by our

inability to adjust spending to compensate for the shortfall. In addition, because a significant portion of Harmonic’s business is derived from orders placed by a limited number of large customers, the timing of such orders can also cause significant fluctuations in our operating results.

On December 8, 2006, Harmonic completed its acquisition of the video networking software business of Entone Technologies, Inc. for a total purchase price of $49.0 million. The purchase price consisted of a payment of $26.2 million, the issuance of 3,579,715 shares of Harmonic common stock with a value of $20.1 million, the issuance of 175,342 options to purchase Harmonic common stock with a value of $0.2 million, and $2.5 million of transaction costs. Prior to the closing of the acquisition, Entone spun off its consumer premises equipment, or CPE, business into a separate private company.

On July 31, 2007, Harmonic completed its acquisition of Rhozet Corporation, pursuant to the terms of the Agreement and Plan of Merger, or Rhozet Agreement, dated July 25, 2007. Under the Rhozet Agreement, Harmonic paid or will pay an aggregate of approximately $15.5 million in total merger consideration, comprised of approximately $2.5 million in cash, 1,105,656 shares of Harmonic’s common stock in exchange for all of the outstanding shares of capital stock of Rhozet, and approximately $2.8 million of cash which was paid in the first quarter of 2008, as provided in the Rhozet Agreement, to the holders of outstanding options to acquire Rhozet common stock. In addition, in connection with the acquisition, Harmonic incurred approximately $0.7 million in transaction costs. Pursuant to the Rhozet Agreement, approximately $2.3 million of the total merger consideration, consisting of cash and shares of Harmonic common stock, are being held back by Harmonic for at least 18 months following the closing of the acquisition to satisfy certain indemnification obligations of Rhozet’s shareholders pursuant to the terms of the Rhozet Agreement.

In the fourth quarter of 2007, we sold and issued 12,500,000 shares of common stock in a public offering at a price of $12.00 per share. Our net proceeds from the offering were approximately $141.8 million, which was net of underwriters’ discounts and commissions of approximately $7.4 million and related legal, accounting, printing and other costs totaling approximately $0.7 million. The net proceeds from the offering have been or may in the future be used for general corporate purposes, including payment of existing liabilities, research and development, the development or acquisition of new products or technologies, equipment acquisitions, strategic acquisitions of businesses, general working capital and operating expenses. The offering was made pursuant to our Registration Statement on Form S-3 (File No. 333-123823) filed with the SEC on April 4, 2005, and declared effective by the SEC on April 22, 2005, and the related prospectus supplement filed with the SEC on October 31, 2007.

In 2001 and 2002, excess facilities and fixed asset impairment charges totaling $52.6 million were recorded due to the Company’s reduced headcount, difficult business conditions and a weak local commercial real estate market. In the fourth quarter of 2005, the excess facilities liability was decreased by $1.1 million due to subleasing a portion of the unoccupied portion of one building for the remainder of the lease. In the third quarter of 2006, we completed our facilities rationalization plan resulting in more efficient use of our Sunnyvale campus and vacated several buildings, some of which were subsequently subleased. This resulted in a net charge for excess facilities of $2.1 million in the third quarter of 2006. In the third quarter of 2007, we recorded a net credit of $1.4 million resulting primarily from an extension of a subleased building to the lease expiration. During the second quarter of 2008, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $1.2 million from a revised estimate of expected sublease income of a Sunnyvale building. The lease terminates in September 2010 and all sublease income from this building has been eliminated from the calculation of the estimated liability. During the third quarter of 2008, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $0.2 million from a revised estimate of expected sublease income of two buildings in England. The leases terminate in October 2010 and all sublease income has been eliminated from the estimated liability. In the event we are unable to achieve expected levels of sublease rental income, we will need to revise our estimate of the liability, which could materially impact our financial position, liquidity, cash flows and results of operations.

Adverse economic conditions in markets in which we operate and into which we sell our products can harm our business. Recently, economic conditions in the countries in which we operate and sell products have become increasingly negative, and global financial markets have experienced a severe downturn stemming from a multitude of factors, including adverse credit conditions impacted by the subprime-mortgage crisis, slower economic activity, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate

profits and capital spending, adverse business conditions and liquidity concerns and other factors. Economic growth in the U.S. and in many other countries slowed in the fourth quarter of 2007, remained slow for the first three quarters of 2008, and is expected to slow further or recede in the fourth quarter of 2008 in the U.S. and internationally. During challenging economic times, and in tight credit markets, many customers may delay or reduce capital expenditures. This could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable, excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties.

The Company is in the process of expanding its international operations and staff to better support its expansion into international markets. This expansion includes the implementation of an international structure that includes, among other things, a research and development cost-sharing arrangement, certain licenses and other contractual arrangements by and among the Company and its wholly-owned domestic and foreign subsidiaries. The Company’s foreign subsidiaries have acquired certain rights to sell the Company’s existing intellectual property and intellectual property that will be developed or licensed in the future. As a result of these changes and an expanding customer base internationally, the Company expects that an increasing percentage of its consolidated pre-tax income will be derived from, and reinvested in, its international operations. The Company anticipates that this pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the United States federal statutory tax rate.

Critical Accounting Policies, Judgments and Estimates

The preparation of financial statements and related disclosures requires Harmonic to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements and accompanying notes. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were made.

Our significant accounting policies are described in Note 1 to the annual consolidated financial statements as of and for the year ended December 31, 2007, included in our Annual Report on Form 10-K filed with the SEC on March 17, 2008 and notes to condensed consolidated financial statements as of and for the three and nine month periods ended September 26, 2008, included herein. Our most critical accounting policies have not changed since December 31, 2007, except that in the second quarter of 2008 we revised our critical accounting policy related to the accounting for income taxes, and includes the following:

•		Revenue recognition;
•		Allowances for doubtful accounts, returns and discounts;
•		Valuation of inventories;
•		Impairment of long-lived assets;
•		Restructuring costs and accruals for excess facilities;
•		Assessment of the probability of the outcome of current litigation;
•		Accounting for income taxes, and
•		Stock-based compensation.

In preparing our financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. This involves estimating our actual current tax exposures and assessing temporary and permanent differences resulting from differing treatment of items, such as reserves and accruals, for tax and accounting purposes.

Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our accompanying condensed consolidated balance sheets, as well as operating loss and tax credit carryforwards. We follow the guidelines set forth in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109, regarding the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. Determining necessary allowances requires us to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. In the first nine months of 2008, our discrete valuation release totaled $19.0 million, of which $16.1 million was recorded as a benefit to the provision for income taxes and $2.9 million as a reduction to goodwill. In addition, during the first nine months of 2008, an adjustment of $2.9 million was recorded to Additional Paid in Capital due to the realization of excess tax benefits from stock-based compensation. In accordance with SFAS 109, we have evaluated our need for a valuation allowance based on historical evidence, trends in profitability, expectations of future taxable income and implemented tax planning strategies. In periods following the release of our valuation allowance our expectation is that the Company will experience a substantial increase in our effective tax rate.

We are subject to examination of our income tax returns by various tax authorities on a periodic basis. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of our provision for income taxes. We adopted the provisions of FIN 48 as of the beginning of 2007. Prior to adoption, our policy was to establish reserves that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate in the period of resolution. FIN 48 requires application of a more-likely-than-not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, FIN 48 permits us to recognize a tax benefit measured at the largest amount of tax benefit that, in our judgment, is more than 50 percent likely to be realized upon settlement. If further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change.

We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves and penalties as well as the related interest, in light of changing facts and circumstances. Changes in our assessment of our uncertain tax positions or settlement of any particular position could materially impact our income tax rate, financial position and cashflows.

Results of Operations

Harmonic’s historical consolidated statements of operations data for the third quarter and first nine months of 2008 and the third quarter and first nine months of 2007 as a percentage of net sales, are as follows:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Net sales			100				100				100				100
Cost of sales			52				57				52				58
Gross profit			48				43				48				42
Operating expenses:
Research and development			15				13				15				14
Selling, general and administrative			21				18				21				21
Write-off of acquired in-process technology			—				1				—				—
Amortization of intangibles			—				—				—				—
Total operating expenses			36				32				36				35
Income from operations			12				11				12				7
Interest income, net			3				1				3				1
Other income (expense), net			(2	)			—				(1	)			—
Income before income taxes			13				12				14				8
Provision for (benefit from) income taxes			—				1				(5	)			—
Net income			13	%			11	%			19	%			8	%

Service revenue and service cost of sales were each below 10% of net sales in the third quarter and first nine months of 2008 and, therefore, were included in product sales and product cost of sales.

Net Sales — Consolidated

Harmonic’s consolidated net sales in the third quarter and first nine months of 2008 compared with the corresponding periods in 2007 are presented in the table below. Also presented are the related dollar and percentage change in consolidated net sales in the third quarter and first nine months of 2008 compared with the corresponding periods in 2007.

Sales Data:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
Video Processing		$	32,284			$	38,623			$	101,152			$	92,790
Edge and Access			43,029				29,156				124,191				95,891
Software, Support and Other			16,142				14,516				42,728				35,133
Net sales		$	91,455			$	82,295			$	268,071			$	223,814
Video Processing increase (decrease)		$	(6,339	)						$	8,362
Edge and Access increase			13,873								28,300
Software, Support and Other increase			1,626								7,595
Total increase		$	9,160							$	44,257
Video Processing percent change			(16.4	)%							9.0	%
Edge and Access percent change			47.6	%							29.5	%
Software, Support and Other percent change			11.2	%							21.6	%
Total percent change			11.1	%							19.8	%

Net sales increased in the third quarter of 2008 compared to the third quarter of 2007 principally due to stronger demand for our products from our domestic satellite and cable customers for their VOD and HDTV deployments. The sales of products of the video processing product line were lower in the third quarter of 2008 compared to the same period in the prior year due primarily to decreased spending from international customers. The increase in sales of products of the edge and access products line in the third quarter of 2008 compared to the same period in 2007 was primarily due to an increase in sales of the Company’s NSG edgeQAM devices for VOD, switched digital and Cable Modem Termination System, or CMTS, deployments by domestic cable operators.

Net sales increased in the first nine months of 2008 compared to the first nine months of 2007 principally due to stronger demand for our products from our domestic satellite and cable customers for VOD and HDTV deployments, and an increase in sales to new customers internationally. The sales of products of the video processing product line were higher in the first nine months of 2008 compared to the same period in the prior year due primarily to increased purchases of our products from domestic satellite customers. The increase in sales of products of the edge and access products line in the first nine months of 2008 compared to the same period in 2007 was primarily due to an increase in sales of the Company’s NSG edgeQAM devices for VOD, switched digital and Cable Modem Termination System, or CMTS, deployments by domestic and international cable operators. The sales of software, support and other products was higher in the first nine months of 2008 compared to the same period in the prior year primarily from software sales of new products and revenue from system integration projects.

Net Sales — Geographic

Harmonic’s domestic and international net sales in the third quarter and first nine months of 2008 compared with the corresponding periods in 2007 are presented in the table below. Also presented are the related dollar and percentage change in domestic and international net sales in the third quarter and first nine months of 2008 compared with the corresponding periods in 2007.

Geographic Sales Data:

		Three Months Ended								Nine Months Ended
		September 26,				September 28,				September 26,				September 28,
		2008				2007				2008				2007
U.S.		$	55,669			$	44,638			$	153,565			$	125,447
International			35,786				37,657				114,506				98,367
Net sales		$	91,455			$	82,295			$	268,071			$	223,814
U.S. increase		$	11,031							$	28,118
International increase (decrease)			(1,871	)							16,139
Total increase		$	9,160							$	44,257
U.S. percent change			24.7	%							22.4	%
International percent change			(5.0	)%							16.4	%
Total percent change			11.1	%							19.8	%