Washington, D.C. 20549

Delaware		77-0201147
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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: [X]		Accelerated filer: [   ]		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 95,659,617 on May 1, 2009.

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(In thousands, except par value amounts)		April 3, 2009				December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents		$	110,891			$	179,891
Short-term investments			150,943				147,272
Accounts receivable, net of allowances of $5,566 and $8,697			52,698				63,923
Inventories			38,213				26,875
Deferred income taxes			36,384				36,384
Prepaid expenses and other current assets			14,703				15,985
Total current assets			403,832				470,330
Property and equipment, net			19,824				15,428
Goodwill			62,730				41,674
Intangibles, net			35,283				12,069
Other assets			18,839				24,862
Total assets		$	540,508			$	564,363
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	13,126			$	13,366
Income taxes payable			2,365				1,434
Deferred revenue			27,646				29,909
Accrued liabilities			45,539				50,490
Total current liabilities			88,676				95,199
Accrued excess facilities costs, long-term			3,356				4,953
Income taxes payable, long-term			40,910				41,555
Other non-current liabilities			5,614				8,339
Total liabilities			138,556				150,046
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued			—				—
Common stock, $0.001 par value, 150,000 shares authorized; 95,477 and 95,017 shares issued and outstanding			96				95
Capital in excess of par value			2,269,525				2,263,236
Accumulated deficit			(1,867,238	)			(1,848,394	)
Accumulated other comprehensive loss			(431	)			(620	)
Total stockholders’ equity			401,952				414,317
Total liabilities and stockholders’ equity		$	540,508			$	564,363

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

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three Months Ended
(In thousands, except per share data)		April 3, 2009				March 28, 2008
Product sales		$	59,907			$	80,149
Service revenue			7,849				7,128
Net sales			67,756				87,277
Product cost of sales			38,681				42,117
Service cost of sales			3,690				2,881
Total cost of sales			42,371				44,998
Gross profit			25,385				42,279
Operating expenses:
Research and development			14,496				13,193
Selling, general and administrative			21,290				17,448
Amortization of intangibles			389				160
Total operating expenses			36,175				30,801
Income (loss) from operations			(10,790	)			11,478
Interest income, net			1,358				3,017
Other expense, net			(494	)			(214	)
Income (loss) before income taxes			(9,926	)			14,281
Provision for income taxes			8,917				927
Net income (loss)		$	(18,843	)		$	13,354
Net income (loss) per share:
Basic		$	(0.20	)		$	0.14
Diluted		$	(0.20	)		$	0.14
Weighted average shares:
Basic			95,306				94,052
Diluted			95,306				95,212

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

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

		Three Months Ended
		April 3,				March 28,
(In thousands)		2009				2008
Cash flows from operating activities:
Net income (loss)		$	(18,843	)		$	13,354
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of intangibles			1,886				1,625
Depreciation			1,855				1,729
Stock-based compensation			2,374				1,520
Net loss on disposal of fixed assets			37				8
Other non-cash adjustments, net			626				136
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net			17,329				12,424
Inventories			4,583				1,167
Prepaid expenses and other assets			9,524				5,191
Accounts payable			(3,203	)			(8,897	)
Deferred revenue			(3,068	)			(7,479	)
Income taxes payable			153				264
Accrued excess facilities costs			(1,556	)			(1,573	)
Accrued and other liabilities			(16,423	)			(7,592	)
Net cash provided by (used in) operating activities			(4,726	)			11,877
Cash flows from investing activities:
Purchases of investments			(60,657	)			(9,990	)
Proceeds from maturities and sales of investments			58,728				53,765
Acquisition of property and equipment			(1,455	)			(1,796	)
Acquisition of Rhozet			(453	)			(2,828	)
Acquisition of Scopus			(62,397	)			—
Net cash provided by (used in) investing activities			(66,234	)			39,151
Cash flows from financing activities:
Proceeds from issuance of common stock, net			2,025				2,395
Net cash provided by financing activities			2,025				2,395
Effect of exchange rate changes on cash and cash equivalents			(65	)			(53	)
Net increase (decrease) in cash and cash equivalents			(69,000	)			53,370
Cash and cash equivalents at beginning of period			179,891				129,005
Cash and cash equivalents at end of period		$	110,891			$	182,375
Supplemental disclosure of cash flow information:
Income tax payments, net		$	2,203			$	686
Non-cash investing and financing activities:
Issuance of restricted common stock for Rhozet acquisition		$	1,870			$	—

The accompanying notes are an integral part of these condensed 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 2, 2009. 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, 2009, 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 impact on previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) uses the fair value definition in SFAS 157, which defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS 141(R) also changes the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141 (R). SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, and was adopted by us on January 1, 2009. See Note 3 for disclosures relating to the acquisition of Scopus Video Networks Ltd., or Scopus, which was completed on March 12, 2009.

In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, which delayed the effective date of SFAS No. 157, Fair Value Measurements, to fiscal years ending after November 15, 2008 for non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS 157-2 became effective for interim and annual periods beginning after November 15, 2008. The adoption of FSP FAS 157-2 in the first quarter of 2009 did not have a material impact on the Company’s financial position or results of operations.

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 has been adopted by us in the first quarter of fiscal 2009. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition.

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. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption was prohibited. The adoption of FSP 142-3 in the first quarter of fiscal 2009 did not have a material effect on our consolidated results of operations and financial condition.

In November 2008, the Emerging Issues Task Force issued EITF No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF 08-7”) that clarifies accounting for defensive intangible assets subsequent to initial measurement. EITF 08-7 applies to acquired intangible assets which an entity has no intention of actively using, or intends to discontinue use of, but holds it (locks up) to prevent others from obtaining access to it (i.e., a defensive intangible asset). Under EITF 08-7, the Task Force reached a consensus that an acquired defensive asset should be accounted for as a separate unit of accounting (i.e., an asset separate from other assets of the acquirer); and the useful life assigned to an acquired defensive asset should be based on the period which the asset would diminish in value. EITF 08-7 is effective for defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008. The adoption of EITF 08-7 in the first quarter of fiscal 2009 did not have a material impact on our consolidated results of operations and financial condition.

In April 2009, the FASB issued the following new accounting standards:
 

	•		FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.
	•		FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, and is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

•

FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 provides additional guidance to provide greater clarity about the credit and noncredit component of another-than-temporary impairment event and to more effectively communicate when another-than-temporary impairment event has occurred. This FSP applies to debt securities.

All three FSPs are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Upon implementation at the beginning of the second quarter of 2009, the FSPs are not expected to have a significant impact on our consolidated financial statements.

NOTE 3: SCOPUS ACQUISITION

On March 12, 2009, Harmonic completed the acquisition of 100% of the equity interests of Scopus Video Networks Ltd., or Scopus, a publicly traded company based in Israel. Scopus engages in the development and support of digital video networking products that allow network operators to transmit, process, and manage digital video content. Scopus’ primary products include integrated receivers/decoders (“IRD”), intelligent video gateways (“IVG”), and encoders. In addition, the Company markets multiplexers, network management systems (“NMS”), and other ancillary technology to its customers.

The acquisition of Scopus strengthens Harmonic’s technology and market leadership, particularly in the broadcast contribution and distribution markets. The acquisition extends Harmonic’s diversification strategy, providing it with an expanded international sales force and global customer base, particularly in video broadcast, contribution and distribution markets, as well as complementary video processing technology and expanded research and development capability. In addition, the acquisition provides an assembled workforce, the implicit value of future cost savings as a result of combining entities, and is expected to provide Harmonic with future unidentified new products and technologies, These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Scopus’ net tangible and intangible assets acquired resulting in goodwill of approximately $21.0 million that was recorded in connection with this acquisition.

The purchase price, net of $23.3 million of cash acquired, was $62.4 million, which was paid from existing cash balances. We also incurred a total of $3.4 million of transaction expenses, which were expensed as selling, general and administrative expenses in the first quarter of 2009.

The assets and liabilities of Scopus were recorded at fair value at the date of acquisition. We will recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period shall not exceed one year from the acquisition date. Further, any associated restructuring activities will be expensed in future periods and not recorded through purchase accounting as previously done under SFAS 141. Subsequent to the acquisition, we recorded expenses in the period ended April 3, 2009, primarily for excess and obsolete inventories related to product discontinuances and severance costs.

The results of operations of Scopus are included in Harmonic’s Condensed Consolidated Statements of Operations from March 12, 2009, the date of acquisition. The following table summarizes the allocation of the purchase price based on the fair value of the assets acquired and the liabilities assumed at the date of acquisition:

(In thousands)
Cash acquired		$	23,316
Investments			1,899
Accounts receivable (Gross amount due from accounts receivable of $6,789)			6,120
Inventory			15,899
Fixed assets			4,833
Other tangible assets acquired			2,312
Intangible assets:
Existing technology			10,100
In-process technology			2,400
Patents/core technology			3,500
Customer contracts and related relationships			4,000
Trade names/trademarks			2,100
Order backlog			2,000
Maintenance agreements and related relationships			1,000
Goodwill			21,040
Total assets acquired			100,519
Accounts payable			(2,963	)
Deferred revenue			(336	)
Other accrued liabilities			(11,507	)
Net assets acquired			85,713
Less: cash acquired			(23,316	)
Net purchase price		$	62,397

The purchase price set forth in the table above was based on the fair value of the tangible and intangible assets acquired and liabilities assumed as of the March 12, 2009. We used an overall discount rate of 16% to estimate the fair value of the intangible assets acquired, which was derived based on financial metrics of comparable companies operating in Scopus’ industry. In determining the appropriate discount rates to use in valuing each of the individual intangible assets, we adjusted the overall discount rate of 16% giving consideration to the specific risk factors of each asset. The following methods, using SFAS 157 as the framework for measuring fair value, were used to value the identified intangible assets:

	•		The fair value of the existing technology assets acquired were established based on their highest and best used by a market participant using the “Income Approach.” The Income Approach includes an analysis of the markets, cash flows and risks associated with achieving such cash flows to calculate the fair value. As of the acquisition date, Scopus was developing new versions and incremental improvements to its IRD, encoder and IVG products;
	•		The in-process projects are at a stage of development that require further research and development to determine technical feasibility and commercial viability. The fair value of the in-process technology assets acquired were based on the valuation premise that the assets would be “In-Use” using a discounted cash flow model;
	•		The fair value of patents/core technology assets acquired were established based on a variation of the Income Approach called the “Profit Allocation Method”. In the Profit Allocation Method, we estimate the value of the patents/core technology by capitalizing the profits saved because Harmonic owns the technology;
	•		The fair value of the customer contracts and related relationships assets acquired were based on the Income Approach;
	•		The fair value of the maintenance agreements and related relationships assets acquired were based on the Income Approach;
	•		The fair value of trade names/trademarks assets acquired were established based on the Profit Allocation Method, and

•

The fair value of backlog acquired was established based on the “Cost Savings Approach.”

Identified intangible assets are being amortized over the following useful lives:

	•		Existing technology is estimated to have a useful life between three years and five years;
	•		In-process technology will be amortized upon completion over its projected remaining useful life as assessed on the completion date. The completion of the in-process technology is expected within the next twelve months;
	•		Patents/core technology are being amortized over their useful life of four years;
	•		Customer contracts and related relationships are being amortized over their useful life of between four years and five years;
	•		Maintenance agreements and related relationships are being amortized over their useful life of four years, and
	•		Trade name/trademarks are being amortized over their useful lives of five years; and
	•		Order backlog is being amortized over its useful life of six months.

The existing technology, patents/core technology, customer contracts, maintenance agreements, trade name/trademarks and backlog are being amortized using the straight-line method which reflects the future projected cash flows.

The residual purchase price of $21.0 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 Scopus 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 on January 1, 2008. The unaudited pro forma financial information for the three months ended March 28, 2008 combines the results for Harmonic for the three months ended March 28, 2008, and the historical results of Scopus for the three months ended March 31, 2008. The unaudited pro forma financial information for the three months ended April 3, 2009 combines the results for Harmonic for the three months ended April 3, 2009 with the results of Scopus through March 12, 2009, the acquisition date. 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				Three Months Ended
(In thousands, except per share data)		April 3, 2009				March 28, 2008
Net sales		$	72,084			$	103,533
Net loss		$	(29,409	)		$	(248	)
Net income (loss) per share — basic		$	(0.31	)		$	0.00
Net income (loss) per share — diluted		$	(0.31	)		$	0.00

For the period from March 12, 2009 to April 3, 2009, Scopus products contributed revenues of $1.5 million and a net loss of $8.3 million. Included in the net loss attributable to Scopus for the first quarter of 2009 are excess and obsolete inventories expense of $5.8 million and severance expenses of $1.1 million.

NOTE 4: FAIR VALUE

Statement of Financial Accounting Standards 157, “Fair Value Measurements” (SFAS 157) establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. SFAS 157 requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.

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 primarily uses broker quotes in a non-active market for valuation of its short-term investments.
	•		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 of its financial assets and liabilities on a recurring basis. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. During the three months ended April 3, 2009, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

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 April 3, 2009:

(In thousands)		Level 1				Level 2				Level 3				Total
April 3, 2009
Money market funds		$	74,816			$	¾			$	¾			$	74,816
U.S. corporate debt			¾				68,944				¾				68,944
U.S. and state government agencies			¾				80,088				¾				80,088
Other debt securities			¾				1,911				¾				1,911
		$	74,816			$	150,943			$	¾			$	225,759
Forward exchange contracts			¾				5,965				¾				5,965
Buy/sell currency options			¾				1,000				¾				1,000
Total assets		$	74,816			$	157,908			$	¾			$	232,724

(In thousands)		Level 1				Level 2				Level 3				Total
December 31, 2008
Money market funds		$	146,065			$	¾			$	¾			$	146,065
U.S. corporate debt			¾				65,680				¾				65,680
U.S. and state government agencies			¾				75,859				¾				75,859
Auction rate securities			¾				¾				10,732				10,732
		$	146,065			$	141,539			$	10,732			$	298,336
Forward exchange contracts			¾				8,724				¾				8,724
Total assets		$	146,065			$	150,263			$	10,732			$	307,060

Our auction rate securities were measured at fair value on a recurring basis using significant Level 3 inputs as of December 31, 2008. As of December 31, 2008, we had approximately $10.7 million of auction rate securities, or ARSs, classified as short-term investments and the fair value of these securities approximated cost at the balance sheet date. These ARSs which were invested in preferred securities in closed end funds, all had a credit rating of AA+ or better and the issuers were paying interest at the maximum contractual rate. During the first quarter of 2009, the Company was able to sell $10.7 million of auction rate securities to an investment manager at par, plus accrued interest and dividends.

The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the three month periods ended April 3, 2009 and March 28, 2008:

(in thousands)		April 3, 2009				March 28, 2008
Balance as of December 31		$	10,732			$	—
Transfers in to (out of) Level 3			—				34,863
Purchases and sales, net			(10,732	)			(8,130	)
Ending Balance		$	—			$	26,733

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

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
(In thousands)		Cost				Gains				Losses				Fair Value
April 3, 2009
U.S. and state government debt securities		$	79,702			$	429			$	(43	)		$	80,088
Corporate debt securities			69,196				114				(366	)			68,944
Other debt securities			1,911				¾				¾				1,911
Total		$	150,809			$	543			$	(409	)		$	150,943
December 31, 2008
U.S. and state government debt securities		$	70,396			$	476			$	(12	)		$	70,860
Corporate debt securities			66,360				81				(761	)			65,680
Other debt securities			10,732				¾				¾				10,732
Total		$	147,488			$	557			$	(773	)		$	147,272

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 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.

As of April 3, 2009, there are no individual available-for-sale securities in a material unrealized loss position and the amount of unrealized losses on the total investment balance was insignificant.

NOTE 5: INVENTORIES

		April 3,				December 31,
(In thousands)		2009				2008
Raw materials		$	8,893			$	5,562
Work-in-process			5,037				1,167
Finished goods			24,283				20,146
		$	38,213			$	26,875

NOTE 6: GOODWILL AND IDENTIFIED INTANGIBLES

The following is a summary of goodwill and intangible assets as of April 3, 2009 and December 31, 2008:

		April 3, 2009												December 31, 2008
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In Thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Identified intangibles:
Patents/Existing/Core technology		$	62,919			$	(41,323	)		$	21,596			$	49,307			$	(39,838	)		$	9,469
In-process technology			2,400				—				2,400				—				—				—
Customer relationships/contracts			37,895				(32,668	)			5,227				33,895				(32,550	)			1,345
Trademark and trade name			7,346				(4,633	)			2,713				5,244				(4,559	)			685
Supply agreement			3,386				(3,386	)			—				3,386				(3,386	)			—
Maintenance agreements			1,600				(153	)			1,447				600				(121	)			479
Software license and intellectual property			309				(242	)			67				309				(218	)			91
Backlog			2,000				(167	)			1,833				—				—				—
Subtotal of identified intangibles			117,855				(82,572	)			35,283				92,741				(80,672	)			12,069
Goodwill			62,730				—				62,730				41,674				—				41,674
Total goodwill and other intangibles		$	180,585			$	(82,572	)		$	98,013			$	134,415			$	(80,672	)		$	53,743

The changes in the carrying amount of goodwill for the three months ended April 3, 2009 are as follows:

(In Thousands)		Goodwill
Balance as of December 31, 2008		$	41,674
Acquisition of Scopus Video Networks			21,040
Foreign currency translation adjustments			16
Balance as of April 3, 2009		$	62,730

For the three months ended April 3, 2009, the Company recorded a total of $1.9 million of amortization expense for identified intangibles, of which $1.5 million was included in cost of sales. For the three months ended March 28, 2008, the Company recorded a total of $1.6 million of amortization expense for identified intangibles, of which $1.4 million was included in cost of sales. The estimated future amortization expense of purchased intangible assets with definite lives is as follows:

(In Thousands)

						Operating
Years Ending December 31,		Cost of Sales				Expenses				Total
2009 (remaining 9 months)		$	6,621			$	3,456			$	10,077
2010			7,497				2,134				9,631
2011			3,680				2,124				5,804
2012			2,308				1,932				4,240
2013			1,302				1,313				2,615
2014 and thereafter			233				283				516
Total		$	21,641			$	11,242			$	32,883

NOTE 7: RESTRUCTURING AND EXCESS FACILITIES

In the first quarter of 2009, the Company recorded a total of $7.3 million of expenses related to activities resulting from the Scopus acquisition, including the termination of approximately 65 Scopus employees. A charge of $6.3 million was recorded in cost of sales, consisting of excess and obsolete inventory expense from product discontinuance and severance expenses for terminated Scopus employees. Research and development expenses were $0.6 million for terminated Scopus employees. Selling, general and administrative expenses totaled $0.5 million consisting primarily of severance expenses for terminated Scopus employees. Substantially all of the severance was paid during the three months ended April 3, 2009.

The Company has recorded restructuring and excess facilities charges beginning in 2001 and throughout subsequent years as a result of changing conditions in the use of its facilities in the United States and the United Kingdom, or UK. The initial expenses that had been recorded to selling, general and administrative expense and the related liabilities have been adjusted periodically for changes in sublease income estimates.

As of April 3, 2009, accrued excess facilities cost totaled $9.8 million, of which $6.5 million was included in current accrued liabilities and $3.3 million in other non-current liabilities. The Company incurred cash outlays of $1.6 million during the first three months of 2009 principally for lease payments, property taxes, insurance and other maintenance fees related to vacated facilities. Harmonic expects to pay approximately $4.8 million of excess facility lease costs, net of estimated sublease income, for the remainder of 2009 and to pay the remaining $5.0 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 activity under our U.S. and UK facilities restructuring accrual during the first quarter of 2009:

		Excess				Campus				BTL
(In thousands)		Facilities				Consolidation				Closure				Total
Balance at December 31, 2008		$	7,196			$	3,860			$	320			$	11,376
Provisions/(recoveries)			—				35				—				35
Cash payments, net of sublease income			(1,012	)			(556	)			(24	)			(1,592	)
Balance at April 3, 2009		$	6,184			$	3,339			$	296			$	9,819

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 3, 2010. As of April 3, 2009, 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 2008 or 2009. This facility, which was amended and restated in March 2009, 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, 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. At April 3, 2009, Harmonic was in compliance with the covenants under this line of credit facility. Future borrowings pursuant to the line would bear interest at the bank’s prime rate (4.0% at April 3, 2009). Borrowings are payable monthly and are not collateralized.

NOTE 9: BENEFIT PLANS

Stock Option Plans. Harmonic has reserved 17,429,000 shares of Common Stock for issuance under various employee stock option plans. Stock 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. Restricted stock units generally have no exercise price and vest over four years with 25% vesting at one year from date of grant or the vesting commencement date chosen for the award, and either an additional 1/16 per quarter thereafter, or 1/8 semiannually

thereafter. Stock options are granted having exercise prices equal to the fair market value of the stock at the date of grant. Beginning on February 27, 2006, option grants have a term of seven years. Certain option awards provide for accelerated vesting if there is a change in control. In the first quarter of 2009, employees received restricted stock units valued at $6.6 million, which will begin vesting on February 15, 2010.

Director Option Plans. In May 2002, Harmonic’s stockholders approved the 2002 Director Option 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 to 800,000 shares. Harmonic had a total of 667,000 shares of Common Stock reserved for issuance under the Plan as of April 3, 2009. 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, generally have no exercise price and vest either after one year or the vesting commencement date chosen for such award. Restricted stock units granted reduce the number of shares reserved for grant under the Plan by two shares for every unit granted. 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. During 2008 there were a total of 71,833 restricted stock units granted.

The following table summarizes activity under the Plans:

		Shares Available				Stock Options				Weighted Average				RSUs
(In thousands except exercise price)		for Grant				Outstanding				Exercise Price				Outstanding
Balance at December 31, 2008			7,312				10,798			$	10.50				72
Restricted stock units granted			(1,165	)			—				—				1,165
Options granted			(778	)			778				5.63				—
Options exercised			—				(29	)			4.14				—
Options canceled			351				(351	)			11.44				—
Options expired			—				(57	)			24.58				—
Balance at April 3, 2009			5,720				11,139			$	10.07				1,237
Options and RSUs vested and exercisable as of April 3, 2009							6,667			$	11.70
Options and RSUs vested and expected-to-vest as of April 3, 2009							10,944			$	10.12

The weighted-average fair value of options granted for the three months ended April 3, 2009 was $2.85. The weighted-average fair value of restricted stock units granted for the three months ended April 3, 2009 was $5.67.

The following table summarizes information regarding stock options outstanding at April 3, 2009:

						Stock Options Outstanding												Stock Options Exercisable
										Weighted-
										Average
						Number				Remaining								Number				Weighted
Range of Exercise						Outstanding at				Contractual Life				Weighted-Average				Exercisable at				Average
Prices						April 3, 2009				(Years)				Exercise Price				April 3, 2009				Exercise Price
(In thousands, except exercise price and life)
$		0.19 -- 5.63					1,501				5.7			$	4.72				638			$	3.71
		5.66 -- 7.63					1,846				4.5				6.06				1,459				5.97
		7.67 -- 8.17					2,627				6.0				8.16				690				8.15
		8.20 -- 8.95					2,427				4.8				8.40				1,394				8.46
		8.97 -- 11.53					1,717				3.1				9.85				1,465				9.78
	11.60 -- 24.69						573				1.5				22.27				573				22.27
	25.50 -- 121.68						448				0.7				50.00				448				50.00
							11,139				4.6			$	10.07				6,667			$	11.70

The weighted-average remaining contractual life for all exercisable stock options at April 3, 2009 was 3.7 years. The weighted-average remaining contractual life of all vested and expected-to-vest stock options at April 3, 2009 was 4.5 years.

Aggregate pre-tax intrinsic value of options exercisable at April 3, 2009 was $3.5 million. The aggregate intrinsic value of stock options vested and expected-to-vest net of estimated forfeitures was $5.0 million at April 3, 2009. The aggregate intrinsic value of restricted stock units vested and expected-to-vest, net of estimated forfeitures, was $7.9 million at April 3, 2009. Aggregate pre-tax intrinsic value represents the difference between our closing price on the last trading day of the fiscal period, which was $6.94 as of April 3, 2009, 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 insignificant during the three months ended April 3, 2009.

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 or end of the offering period, whichever is lower. Offering 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 three months of 2009 and 2008, the number of shares of stock issued under the purchase plan were 352,071 and 229,808 shares at weighted average prices of $5.41 and $7.58, respectively. The weighted-average fair value of each right to purchase shares of common stock granted under the purchase plan was $2.26 and $2.65 for the first three months of 2009 and 2008, respectively. At April 3, 2009, there were 993,008 shares 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 can make 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. This employer contribution was suspended during the first quarter of 2009.

Stock-based Compensation

The following table summarizes stock-based compensation costs in our Condensed Consolidated Statements of Operations for the three months ended April 3, 2009 and March 28, 2008:

		Three Months Ended
		April 3,				March 28,
(In Thousands)		2009				2008
Employee stock-based compensation in:
Cost of sales		$	338			$	228
Research and development expense			870				553
Selling, general and administrative expense			1,166				739
Total employee stock-based compensation in operating expense			2,036				1,292
Total employee stock-based compensation			2,374				1,520
Amount capitalized as inventory			22				2
Total stock-based compensation		$	2,396			$	1,522

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

		Employee Stock Options								Employee Stock Purchase Plan
		2009				2008				2009				2008
Expected life (years)			4.7				4.7				0.5				0.5
Volatility			60	%			54	%			74	%			47	%
Risk-free interest rate			1.7	%			2.5	%			0.6	%			2.5	%
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 our 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 (loss). In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings, taxing jurisdiction, 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, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, 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 three months ended April 3, 2009, our effective tax rate, which includes discrete items, was (89.8%) compared to 6.5% for the same period a year ago. The difference between our effective tax rate and the federal statutory rate of

35% was primarily attributable to the differential in foreign tax rates, non deductible SFAS 123(R) stock compensation expense, non-deductible acquisition costs, income tax credits, and various discrete items. The discrete items recorded in the current period increased the effective tax rate for the quarter by approximately 60%, which was principally related to new California tax legislation net of a reversal of previously provided foreign income tax due to statute of limitation expirations.

On February 20, 2009, California enacted new legislation, which (among other things) provides for the election of a single factor apportionment formula beginning in 2011. As a result of our anticipated election of the single sales factor, we are required under SFAS 109 to compute our deferred taxes taking into account the reversal pattern and the expected California tax rate under the elective single sales factor. The impact of the new legislation results in a change to the state effective tax rate used to compute the Company’s California deferred tax asset resulting in a corresponding reduction to the amount of previously recorded California deferred tax asset. In addition, we recorded a valuation allowance on a portion of certain California tax attributes that will not be realizable in the foreseeable future given the expected decrease in the amount of income that will be allocated to California under the single factor apportionment formula. The tax impact of the California re-measurement of the deferred taxes and the related valuation allowance has been recorded as a discrete item in the first quarter of fiscal year 2009.

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 include interest and penalties of approximately $50.5 million as of December 31, 2008, and approximately $49.9 million as of April 3, 2009. If all of these unrecognized tax benefits were recognized, the entire amount would impact the provision for income taxes. We anticipate the unrecognized tax benefits to decrease by $2.5 million in the next 12 months due to statute of limitation expirations.

We recognize interest and penalties related to uncertain tax positions in income tax expense. During the quarter ended April 3, 2009, we recorded $0.2 million for interest and penalties related to uncertain tax positions resulting in a balance at April 3, 2009 of $3.9 million.

The tax years 2001- 2008 remain open to examination by various federal, state and foreign taxing jurisdictions to which we are subject.

NOTE 11: NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of the common shares outstanding during the period. The diluted net loss per share is the same as basic net loss per share for the three months ended April 3, 2009 because potential common shares, such as common shares issuable under the exercise of stock options or the employee stock purchase plan, are only considered when their effect would be dilutive.

The following table shows the potentially dilutive shares, consisting of options, restricted stock units and ESPP shares, for the periods presented that were excluded from the net income (loss) computations because their effect was antidilutive:

		Three Months Ended
		April 3,				March 28,
(In thousands)		2009				2008
Potentially dilutive equity awards outstanding			12,958				5,935

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

		Three Months Ended
		April 3,				March 28,
(In thousands, except per share data)		2009				2008
Net income (loss) (numerator)		$	(18,843	)		$	13,354
Shares calculation (denominator):
Weighted average shares outstanding — basic			95,306				94,052
Effect of dilutive securities:
Future issued common stock related to acquisitions			—				201
Potential common stock relating to equity awards outstanding			—				959
Average shares outstanding — diluted			95,306				95,212
Net income (loss) per share — basic		$	(0.20	)		$	0.14
Net income (loss) per share — diluted		$	(0.20	)		$	0.14

NOTE 12: COMPREHENSIVE INCOME (LOSS)

The Company’s total comprehensive income (loss) was as follows:

		Three Months Ended
		April 3,				March 28,
(In thousands)		2009				2008
Net income (loss)		$	(18,843	)		$	13,354
Change in unrealized gain on investments, net			336				106
Foreign currency translation			(147	)			171
Total comprehensive income (loss)		$	(18,654	)		$	13,631

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 type is summarized as follows:

Revenue Information:

		Three Months Ended
		April 3,				March 28,
(In thousands)		2009				2008
Revenue by type:
Video processing		$	30,521			$	34,785
Edge and access			23,553				39,665
Service and support			7,849				7,128
Software and other			5,833				5,699
Total		$	67,756			$	87,277

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

Geographic Information:

		Three Months Ended
		April 3,				March 28,
(In thousands)		2009				2008
Net sales:
United States		$	32,118			$	53,593
Japan			7,818				1,309
International			27,820				32,375
Total		$	67,756			$	87,277
Property and equipment:
United States		$	11,481			$	11,729
International			8,343				2,412
Total		$	19,824			$	14,141

Major Customers. In the first quarter of 2009, sales to Comcast accounted for 16% of net sales. In the first quarter of 2008, sales to EchoStar and Comcast accounted for 21% and 17% of net sales, respectively.

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 $0.1 million for the three months ended April 3, 2009, respectively. As of April 3, 2009, Harmonic liabilities to JDS Uniphase were insignificant.

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 records adjustments 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
		April 3,				March 28,
(In thousands)		2009				2008
Balance at beginning of the period		$	5,360			$	5,786
Scopus acquisition			2,379				—
Accrual for current period warranties			633				1,078
Warranty costs incurred			(1,453	)			(1,242	)
Balance at end of the period		$	6,919			$	5,622

Standby Letters of Credit. As of April 3, 2009, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related to performance bonds and state requirements imposed on employers. The maximum amount of potential future payments under these arrangements was $0.5 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 April 3, 2009.

Guarantees. As of April 3, 2009, Harmonic had no other guarantees outstanding.

NOTE 16: LEGAL PROCEEDINGS

On May 15, 2003, 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. It alleges facts similar to those alleged in the securities class action filed in 2000 and settled in 2008. On December 23, 2008, the Court granted preliminary approval to a settlement of the derivative action. On February 26, 2009, the settlement was submitted to the Court for final approval. The terms of the settlement require final approval of the settlement in the securities action, which has occurred, and payment by the Company of $550,000 to cover plaintiff’s attorneys’ fees. On March 20, 2009, the Court granted final approval, which released Harmonic’s officers and directors from all claims brought in the derivative lawsuit and the Company paid $550,000 for the plaintiff’s attorneys’ fees.

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 September 6, 2008, the judge ordered the parties to mediation. Two mediation sessions were held in November and December 2008. Following the mediation sessions, Harmonic and Litton entered into a settlement agreement on January 15, 2009. The settlement agreement provides that in exchange for a one-time lump sum payment from Harmonic to Litton of $5 million, Litton (i) will not bring suit against Harmonic, any of its affiliates, customers, vendors, representatives, distributors, and its contract manufacturers from having any liability for making, using, offering for sale, importing, and/or selling any Harmonic products that may have incorporated technology that was alleged to have infringed on one or more of the relevant patents and (ii) would release Harmonic from any liability for making, using or selling any Harmonic products that may have infringed on such patents. The Company recorded a provision of $5.0 million in its selling, general and administrative expenses for the year ended December 31, 2008. Harmonic paid the settlement amount in January 2009.

An unfavorable outcome on any other litigation matter 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 any other litigation matter could have a material adverse effect on Harmonic’s business, operating results, financial position or cash flows.

Harmonic 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 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 and services, and our operating results;

•

Our expectation that we will record a total of approximately $6.6 million in amortization of intangibles in cost of sales in the remaining nine months of 2009;

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Our expectation that we will record a total of approximately $3.5 million in amortization of intangibles in operating expenses in the remaining nine months of 2009;

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Our expectation that our capital expenditures will be in the range of $7 million to $8 million during 2009;

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Our expectations regarding the benefits of the Scopus acquisition;

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Our expectations regarding tax rates in foreign jurisdictions as compared to U.S. tax rates and regarding the impact of California tax laws;

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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;

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Our belief that near-term changes in exchange rates will not have a material impact on our operating results, financial position and liquidity;

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Our expectation that sales to cable television, satellite, broadcast and telecommunications operators will constitute a significant portion of net sales for the foreseeable future;

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Our expectation that we will make acquisitions in the future;

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Our expectation that our operations will be affected by new environmental laws and regulations on an ongoing basis;

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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.

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.

On March 12, 2009, Harmonic completed the acquisition of Scopus Video Networks Ltd., or Scopus, a publicly traded company based in Israel. The purchase price, net of $23.3 million of cash acquired, was $62.4 million, which was paid from existing cash balances. Scopus engages in the development and support of digital video networking products that allow network operators to transmit, process, and manage digital video content. Scopus’ primary

products include integrated receivers/decoders (“IRD”), intelligent video gateways (“IVG”), and encoders. In addition, the Company markets multiplexers, network management systems (“NMS”), and other ancillary technology to its customers. The acquisition of Scopus strengthens Harmonic’s technology and market leadership, particularly in the broadcast contribution and distribution markets. The acquisition extends Harmonic’s diversification strategy, providing it with an expanded international sales force and global customer base, particularly in video broadcast, contribution and distribution markets, as well as complementary video processing technology and expanded research and development capability. Results of operations for the Scopus acquisition are reflected in the accompanying Harmonic financial data from the effective date of the acquisition, which was March 12, 2009. Sales of Scopus product are primarily reported within the video processing product line.

In the first quarter of 2009, Harmonic’s net sales of $67.8 million decreased 22% compared to the first quarter of 2008. The decrease in sales in the first quarter of 2009 compared to the corresponding period in 2008 was primarily due to weaker demand from our domestic satellite and worldwide cable customers for products and solutions related to VOD and HDTV. Gross margins decreased in the first quarter of 2009 compared to the corresponding period in 2008 due to lower sales volumes and, in addition, from provisions for excess and obsolete inventory resulting from the discontinuance of certain Scopus products and employee severance costs.

Historically, a majority of our net sales have been to relatively few customers. Due in part to the consolidation of ownership of cable television and direct broadcast satellite systems we expect this customer concentration to continue for the foreseeable future. In the first quarter of 2009, sales to Comcast accounted for 16% of net sales. In the first quarter of 2008, sales to EchoStar and Comcast accounted for 21% and 17% of net sales, respectively.

Sales to customers outside of the U.S. in the first quarter of 2009 represented 53% of net sales, compared to 39% for the comparable period in 2008. A significant portion of 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% in the first three months of 2009 compared to 3% for the comparable period of 2008. We expect international sales to continue to account for a significant portion of our net sales for the foreseeable future.

Harmonic often recognizes 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.

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, rapid changes in foreign exchange rates, 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 during 2008 and the first quarter of 2009, and is expected to continue to be slow for the remainder of 2009 and perhaps longer 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. For example, we believe that the recent global economic slowdown caused certain customers to reduce or delay capital spending plans in the fourth quarter of 2008 and particularly in the first quarter of 2009, and we expect that these conditions could persist well throughout 2009. In addition, during challenging economic times, we are likely to experience increased price-based competition from our competitors, which may result in our losing sales or force us to reduce the prices of our products, which would reduce our revenues and could adversely affect our gross margin.

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 would 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, was 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. Harmonic issued 200,854 shares of common stock and paid approximately $0.5 million to former Rhozet shareholders in March 2009 and all holdback amounts have now been settled.

During the second quarter of 2008, we 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 for such building terminates in September 2010 and all sublease income has been eliminated from the estimated liability. During the third quarter of 2008, we 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 the United Kingdom. The leases for these buildings terminate in October 2010 and all sublease income has been eliminated from the estimated liability.

We are in the process of expanding our international operations and staff to better support our expansion into international markets. This expansion includes the implementation of an international structure that includes, among other things, an international support center in Europe, 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. Our foreign subsidiaries have acquired certain rights to sell our 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, we expect that an increasing percentage of our consolidated pre-tax income will be derived from, and reinvested in, our international operations. We anticipate 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 in future periods. However, the current administration has begun to put forward proposals that may, if enacted, limit the ability of U.S. companies to continue to defer U.S. income taxes on foreign earnings.

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, 2008, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2009 and the notes to the condensed consolidated financial statements as of and for the three month period ended April 3, 2009, included herein. Our most critical accounting policies have not changed since December 31, 2008 and include the following:

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Revenue recognition;

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Allowances for doubtful accounts, returns and discounts;

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Valuation of inventories;

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Impairment of long-lived assets;

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Restructuring costs and accruals for excess facilities;

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Assessment of the probability of the outcome of litigation;

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Accounting for income taxes, and

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Stock-based compensation.

Results of Operations

Harmonic’s historical condensed consolidated statements of operations data for the first quarter of 2009 and the first quarter of 2008 as a percentage of net sales, are as follows:

		Three Months Ended
		April 3,				March 28,
		2009				2008
Product sales			88	%			92	%
Service revenue			12				8
Net sales			100				100
Product cost of sales			57				49
Service cost of sales			6				3
Cost of sales			63				52
Gross profit			37				48
Operating expenses:
Research and development			21				15
Selling, general and administrative			31				20
Amortization of intangibles			1				¾
Total operating expenses			53				35
Income (loss) from operations			(16	)			13
Interest income, net			2				3
Other expense, net			(1	)			¾
Income (loss) before income taxes			(15	)			16
Provision for income taxes			13				1
Net income (loss)			(28	)%			15	%

Net Sales — Consolidated

Harmonic’s consolidated net sales in the first quarter of 2009 compared with the corresponding period in 2008 are presented in the table below. Also presented are the related dollar and percentage change in consolidated net sales in the first quarter of 2009 compared with the corresponding period in 2008.

		Three Months Ended
		April 3,				March 28,
(In thousands, except percentages)		2009				2008
Revenue Data:
Video Processing		$	30,521			$	34,786
Edge and Access			23,553				39,665
Service and Support			7,849				7,128
Software and Other			5,833				5,698
Net sales		$	67,756			$	87,277
Video Processing decrease		$	(4,265	)
Edge and Access decrease			(16,112	)
Service and Support increase			721
Software and Other increase			135
Total decrease		$	(19,521	)
Video Processing percent change			(12.3	)%
Edge and Access percent change			(40.6	)%
Service and Support percent change			10.1	%
Software and Other percent change			2.4	%
Total percent change			(22.4	)%

Net sales decreased in the first quarter of 2009 compared to the same period of 2008 principally due to weaker demand from our domestic satellite and worldwide cable customers for VOD and HDTV deployments. Sales of video processing products were lower in the first quarter of 2009 compared to the same period in the prior year due to lower spending from domestic satellite customers. The decrease in sales of products of the edge and access products line in the first quarter of 2009 compared to the same period in 2008 was primarily due to a decrease in sales of access products and our Narrowcast Services Gateway product, which is used for VOD, switched digital and Cable Modem Termination System, or CMTS deployments, to domestic and international cable operators.

Net Sales — Geographic

Harmonic’s domestic and international net sales in the first quarter of 2009 compared with the corresponding period in 2008 are presented in the table below. Also presented are the related dollar and percentage change in domestic and international net sales in the first quarter of 2009 compared with the corresponding period in 2008.

		Three Months Ended
		April 3,				March 28,
(In thousands, except percentages)		2009				2008
Geographic Sales Data:
U.S.		$	32,118			$	53,593
International			35,638				33,684
Net sales		$	67,756			$	87,277
U.S. decrease		$	(21,475	)
International increase			1,954
Total decrease		$	(19,521	)
U.S. percent change			(40.1	)%
International percent change			5.8	%
Total percent change			(22.4	)%

The decreased U.S. sales in the first quarter of 2009 compared to the corresponding period in 2008 was principally due to weaker demand from our domestic satellite and cable customers for products used in VOD and HDTV deployments.

International sales in the first quarter of 2009 increased compared to the corresponding period in 2008 primarily due to revenue generated from products acquired in the Scopus acquisition and increased revenue from several international satellite projects. We expect that international sales will continue to account for a significant portion of our net sales for the foreseeable future.

Gross Profit

Harmonic’s gross profit and gross profit as a percentage of consolidated net sales in the first quarter of 2009 as compared with the corresponding period of 2008 are presented in the table below. Also presented are the related dollar and percentage change in gross profit in the first quarter of 2009 as compared with the corresponding period of 2008.

		Three Months Ended
		April 3,				March 28,
(In thousands, except percentages)		2009				2008
Gross profit		$	25,385			$	42,279
As a % of net sales			37.5	%			48.4	%
Decrease		$	(16,894	)
Percent change			(40.0	)%

The decrease in gross profit in the first quarter of 2009 as compared to the corresponding period of 2008 was primarily due to lower sales of $19.5 million and provisions totaling $6.3 million primarily for excess and obsolete inventories associated with the discontinuance of certain Scopus products and employee severance costs principally related to the integration of Scopus into Harmonic. The decreased gross margin percentage of 37.5% in the first quarter of 2009 compared to 48.4% in the first quarter of 2008 was lower mainly due to the aforementioned provisions for excess and obsolete inventories as a result of the discontinuance of certain Scopus products and severance costs related to terminated employees. Additionally, the Company paid severance costs to terminated employees in its California operations during the quarter ended April 3, 2009 which were also included in cost of sales.

In the first quarter of 2009, $1.5 million of amortization of intangibles was included in cost of sales compared to $1.4 million in the first quarter of 2008. The higher amortization of intangible expense in the first quarter of 2009 was due to the amortization of intangibles arising from the Scopus acquisition which was completed in March 2009. We expect to record approximately $6.6 million in amortization of intangibles expenses in cost of sales in the remaining nine months of 2009 due to the acquisitions of Entone, Rhozet and Scopus.

Research and Development

Harmonic’s research and development expense and the expense as a percentage of consolidated net sales in the first quarter of 2009, as compared with the corresponding period of 2008, are presented in the table below. Also presented are the related dollar and percentage change in research and development expense in the first quarter of 2009 as compared with the corresponding period of 2008.

		Three Months Ended
		April 3,				March 28,
(In thousands, except percentages)		2009				2008
Research and development expense		$	14,496			$	13,193
As a % of net sales			21.4	%			15.1	%
Increase		$	1,303
Percent change			9.9	%

The increase in research and development expense in the first quarter of 2009 compared to the corresponding period in 2008 was primarily the result of increased compensation of $1.0 million and increased stock-based compensation expense of $0.3 million. The increased compensation expense is primarily due to increased headcount from the Scopus acquisition and severance costs of $0.6 million related to terminated Scopus employees.

Selling, General and Administrative

Harmonic’s selling, general and administrative expense and the expense as a percentage of consolidated net sales in the first quarter of 2009, as compared with the corresponding period of 2008, are presented in the table below. Also presented are the related dollar and percentage change in selling, general and administrative expense in the first quarter of 2009 as compared with the corresponding period of 2008.

		Three Months Ended
		April 3,				March 28,
(In thousands, except percentages)		2009				2008
Selling, general and administrative expense		$	21,290			$	17,448
As a % of net sales			31.4	%			20.0	%
Increase		$	3,842
Percent change			22.0	%

The increase in selling, general and administrative expense in the first quarter of 2009 compared to the corresponding period in 2008 was primarily a result of acquisition-related expenses of $3.4 million associated with the purchase of Scopus during the first quarter of 2009 and increased stock-based compensation expense of $0.4 million. As a result of adoption of SFAS 141(R), the Company is now required to expense acquisition-related costs in its selling, general and administrative expenses whereas prior to the adoption of SFAS 141(R), such costs were capitalized as part of the purchase price allocated to assets and liabilities acquired.

Amortization of Intangibles

Harmonic’s amortization of intangible assets and the expense as a percentage of consolidated net sales in the first quarter of 2009 as compared with the corresponding period of 2008 are presented in the table below. Also presented are the related dollar and percentage change in amortization of intangible assets in the first quarter of 2009 as compared with the corresponding period of 2008.

		Three Months Ended
		April 3,				March 28,
(In thousands, except percentages)		2009				2008
Amortization of intangibles		$	389			$	160
As a % of net sales			0.6	%			0.2	%
Increase		$	229
Percent change			143.1	%