UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission File No. 000-25826

HARMONIC INC.

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

549 Baltic Way
Sunnyvale, CA 94089
(408) 542-2500

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

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 96,920,203 on April 30, 2010.

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 2, 2010				December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	155,960			$	152,477
Short-term investments			111,838				118,593
Accounts receivable, net of allowances of $5,814 and $5,163			70,041				64,838
Inventories			39,609				35,066
Deferred income taxes			26,503				26,503
Prepaid expenses and other current assets			24,043				20,821
Total current assets			427,994				418,298
Property and equipment, net			28,750				25,941
Goodwill			64,637				63,953
Intangibles, net			22,649				25,265
Other assets			24,048				22,847
Total assets		$	568,078			$	556,304
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	21,217			$	22,065
Income taxes payable			1,675				609
Deferred revenue			41,391				32,855
Accrued liabilities			31,092				37,584
Total current liabilities			95,375				93,113
Accrued excess facilities costs, long-term			19				58
Income taxes payable, long-term			41,391				43,948
Financing liability, long-term			11,127				6,908
Other non-current liabilities			2,717				4,804
Total liabilities			150,629				148,831
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; 96,882 and 96,110 shares issued and outstanding			97				96
Capital in excess of par value			2,284,954				2,279,945
Accumulated deficit			(1,867,214	)			(1,872,533	)
Accumulated other comprehensive loss			(388	)			(35	)
Total stockholders’ equity			417,449				407,473
Total liabilities and stockholders’ equity		$	568,078			$	556,304

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

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three Months Ended
		April 2,				April 3,
(In thousands, except per share data)		2010				2009
Product sales		$	74,434			$	59,907
Service revenue			10,388				7,849
Net sales			84,822				67,756
Product cost of sales			41,010				38,681
Service cost of sales			3,006				3,690
Total cost of sales			44,016				42,371
Gross profit			40,806				25,385
Operating expenses:
Research and development			16,966				14,496
Selling, general and administrative			20,845				21,290
Amortization of intangibles			534				389
Total operating expenses			38,345				36,175
Income (loss) from operations			2,461				(10,790	)
Interest income, net			384				1,358
Other expense, net			(371	)			(494	)
Income (loss) before income taxes			2,474				(9,926	)
Provision for (benefit from) income taxes			(2,845	)			8,917
Net income (loss)		$	5,319			$	(18,843	)
Net income (loss) per share:
Basic		$	0.06			$	(0.20	)
Diluted		$	0.05			$	(0.20	)
Weighted average shares:
Basic			96,684				95,306
Diluted			97,344				95,306

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 2,				April 3,
(In thousands)		2010				2009
Cash flows from operating activities:
Net income (loss)		$	5,319			$	(18,843	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of intangibles			2,616				1,886
Depreciation			2,333				1,855
Stock-based compensation			3,243				2,374
Net loss on disposal of fixed assets			19				37
Deferred income taxes			(1,422	)			—
Other non-cash adjustments, net			567				626
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net			(5,204	)			17,329
Inventories			(4,512	)			4,583
Prepaid expenses and other assets			(1,101	)			9,524
Accounts payable			(3,356	)			(3,203	)
Deferred revenue			6,445				(3,068	)
Income taxes payable			(1,616	)			153
Accrued excess facilities costs			(1,697	)			(1,556	)
Accrued and other liabilities			(4,613	)			(16,423	)
Net cash used in operating activities			(2,979	)			(4,726	)
Cash flows from investing activities:
Purchases of investments			(35,367	)			(60,657	)
Proceeds from maturities of investments			41,292				33,013
Proceeds from sales of investments			—				25,715
Acquisition of property and equipment			(1,153	)			(1,455	)
Acquisition of Rhozet			—				(453	)
Acquisition of Scopus			—				(62,397	)
Net cash provided by (used in) investing activities			4,772				(66,234	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net			1,736				2,025
Net cash provided by financing activities			1,736				2,025
Effect of exchange rate changes on cash and cash equivalents			(46	)			(65	)
Net increase (decrease) in cash and cash equivalents			3,483				(69,000	)
Cash and cash equivalents at beginning of period			152,477				179,891
Cash and cash equivalents at end of period		$	155,960			$	110,891
Supplemental disclosure of cash flow information:
Income tax payments, net		$	191			$	2,203
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,” or the “Company”) 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 1, 2010. 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, 2010, 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. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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 October 2009, the FASB issued revised guidance for revenue recognition with multiple deliverables. This guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This revised guidance is effective for us beginning in the first quarter of fiscal year 2011; however early adoption is permitted. The Company is currently evaluating the potential impact, if any, of the adoption of the revised accounting guidance on its consolidated results of operations, financial condition and cash flows.

In October 2009, the FASB issued revised guidance for the accounting for certain revenue arrangements that include software elements. This guidance amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. This revised guidance is effective for us beginning in the first quarter of fiscal year 2011; however early adoption is permitted. The Company does not expect this guidance to significantly impact the Company’s consolidated financial statements.

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for

the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption by the Company in the first quarter of 2010 did not have a material impact on its consolidated results of operations or financial condition.

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 was engaged in the development and support of digital video networking products that allowed network operators to transmit, process, and manage digital video content. Scopus’ primary products included integrated receivers/decoders (“IRD”), intelligent video gateways (“IVG”), and encoders. In addition, Scopus marketed multiplexers, network management systems (“NMS”), and other ancillary technology to its customers.

The acquisition of Scopus strengthened Harmonic’s technology and market leadership, particularly in the broadcast contribution and distribution markets. The acquisition extended 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 provided 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 $22.8 million that was recorded in connection with this acquisition.

The purchase price, net of $23.3 million of cash acquired, was $63.1 million, which was paid from existing cash balances. The Company 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. There were no contingent consideration arrangements in connection with the acquisition.

The assets and liabilities of Scopus were recorded at fair value at the date of acquisition. Further, any associated restructuring activities will be expensed in future periods and not recorded through purchase accounting as previously done under prior accounting guidance. Subsequent to the acquisition, the Company recorded expenses of $8.2 million in the year ended December 31, 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 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 $6,977)			6,308
Inventory			15,899
Fixed assets			4,280
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			22,847
Total assets acquired			101,961
Accounts payable			(2,963	)
Deferred revenue			(336	)
Other accrued liabilities			(12,293	)
Net assets acquired			86,369
Less: cash acquired			(23,316	)
Net purchase price		$	63,053

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 March 12, 2009. The Company 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, the Company adjusted the weighted average cost of capital of 16% giving consideration to the specific risk factors of each asset. The following methods were used to value the identified intangible assets:

	•		The fair value of the existing technology assets acquired was established based on their highest and best used by a market participant using the “Income Approach.” The Income Approach included 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 were at a stage of development that required further research and development to determine technical feasibility and commercial viability. The fair value of the in-process technology assets acquired was 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 was established based on a variation of the Income Approach called the “Profit Allocation Method”. In the Profit Allocation Method, we estimated 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 was based on the Income Approach;

	•		The fair value of the maintenance agreements and related relationships assets acquired was based on the Income Approach;
	•		The fair value of trade names/trademarks assets acquired was 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 is being amortized upon completion over its projected remaining useful life as assessed on the completion date. Three of the in-process projects were completed in the fourth quarter of 2009 and the remaining three projects were completed in the first quarter of 2010. The completed technology is estimated to have useful lives between three and six years;
	•		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 was amortized over its useful life of six months.

The existing technology, patents/core technology, customer contracts, maintenance agreements and related relationships, 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 $22.8 million has been recorded as goodwill. The goodwill as a result of this acquisition is not deductible for federal tax purposes.

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, 2009. 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, and the historical results of Scopus through March 12, 2009, the date of acquisition. 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
(In thousands, except per share data)		April 3, 2009
Net sales		$	72,084
Net loss		$	(29,409	)
Net loss per share — basic		$	(0.31	)
Net loss per share — diluted		$	(0.31	)

For the period from March 13, 2009 to April 3, 2009, Scopus products contributed revenues of $1.5 million and a net loss of $8.3 million. Included in the loss for the first quarter are excess and obsolete inventories expense of $5.8 million and severance expenses of $1.1 million.

NOTE 4: FAIR VALUE

The applicable accounting guidance establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. This guidance 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 measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.

The guidance 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 must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:

	•		Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
	•		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 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 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. During the three months ended April 2, 2010, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of April 2, 2010 and December 31, 2009 based on the three-tier fair value hierarchy:

(In thousands)		Level 1				Level 2				Level 3				Total
April 2, 2010
Money market funds		$	117,274			$	¾			$	¾			$	117,274
Corporate bonds			¾				34,231				¾				34,231
Corporate commercial paper			¾				7,194				¾				7,194
U.S. federal government bonds			¾				33,112				¾				33,112
State, municipal and local government agencies bonds			¾				33,877				¾				33,877
Foreign government debt securities			¾				1,221				¾				1,221
Total assets		$	117,274			$	109,635			$	¾			$	226,909

(In thousands)		Level 1				Level 2				Level 3				Total
December 31, 2009
Money market funds		$	114,898			$	¾			$	¾			$	114,898
Corporate bonds			¾				35,707				¾				35,707
U.S. federal government bonds			¾				46,536				¾				46,536
State, municipal and local government agencies bonds			¾				30,381				¾				30,381
Other debt securities			¾				5,969				¾				5,969
Total assets		$	114,898			$	118,593			$	¾			$	233,491

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

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
(In thousands)		Cost				Gains				Losses				Fair Value
April 2, 2010
U.S. federal, state, municipal and local government agencies bonds		$	66,922			$	101			$	(34	)		$	66,989
Foreign government debt securities			1,102				119				¾				1,221
Corporate debt securities			41,393				57				(25	)			41,425
Total		$	109,417			$	277			$	(59	)		$	109,635
December 31, 2009
U.S. federal, state, municipal and local government agencies bonds		$	76,712			$	214			$	(9	)		$	76,917
Corporate debt securities			35,655				74				(22	)			35,707
Other debt securities			5,744				234				(9	)			5,969
Total		$	118,111			$	522			$	(40	)		$	118,593

Impairment of Investments

Harmonic monitors its 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, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the Company’s financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in our industry; and the Company’s relative competitive position within the industry. At the present time, the Company does not intend to sell its investments that have unrealized losses in accumulated other comprehensive income (loss). In addition, the Company does not believe that it is more likely than not that it will be required to sell its investments that have unrealized losses in accumulated other comprehensive income (loss) before the Company recovers the principal amounts invested. The Company believes that the unrealized losses are temporary and do not require an other-than-temporary impairment, based on our evaluation of available evidence as of April 2, 2010.

As of April 2, 2010, there were 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 2,				December 31,
(In thousands)		2010				2009
Raw materials		$	8,774			$	8,633
Work-in-process			2,441				3,072
Finished goods			28,394				23,361
		$	39,609			$	35,066

NOTE 6: GOODWILL AND IDENTIFIED INTANGIBLES

The following is a summary of goodwill and intangible assets as of April 2, 2010 and December 31, 2009:

		April 2, 2010												December 31, 2009
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Identified intangibles:
Developed core technology		$	65,391			$	(50,016	)		$	15,375			$	64,864			$	(48,013	)		$	16,851
In-process technology			—				—				—				600				—				600
Customer relationships/contracts			37,897				(33,828	)			4,069				37,900				(33,541	)			4,359
Trademarks and tradenames			7,357				(5,284	)			2,073				7,369				(5,136	)			2,233
Supply agreements			3,408				(3,408	)			—				3,427				(3,427	)			—
Maintenance agreements and related relationships			1,600				(489	)			1,111				1,600				(405	)			1,195
Software license, intellectual property and assembled workforce			309				(288	)			21				309				(282	)			27
Order backlog			2,000				(2,000	)			—				2,000				(2,000	)			—
Subtotal of identified intangibles			117,962				(95,313	)			22,649				118,069				(92,804	)			25,265
Goodwill			64,637				—				64,637				63,953				—				63,953
Total goodwill and other intangibles		$	182,599			$	(95,313	)		$	87,286			$	182,022			$	(92,804	)		$	89,218

The changes in the carrying amount of goodwill for the three months ended April 2, 2010 are as follows:

(In thousands)		Goodwill
Balance as of December 31, 2009		$	63,953
Adjustment to deferred tax liability associated with the Scopus acquisition			786
Foreign currency translation adjustments			(102	)
Balance as of April 2, 2010		$	64,637

For the three months ended April 2, 2010, the Company recorded a total of $2.6 million of amortization expense for identified intangibles, of which $2.1 million was included in cost of sales. 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. 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
2010 (remaining 9 months)		$	6,012			$	1,601			$	7,613
2011			4,214				2,124				6,338
2012			2,840				1,932				4,772
2013			1,569				1,313				2,882
2014			500				283				783
2015			261				—				261
Total		$	15,396			$	7,253			$	22,649

NOTE 7: RESTRUCTURING AND EXCESS FACILITIES

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.

In the first quarter of 2009, the Company recorded a total of $7.4 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 inventories expenses from product discontinuances 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.

As of April 2, 2010, accrued excess facilities cost totaled $3.6 million, substantially all of which was included in current accrued liabilities and is expected to be paid in the remainder of 2010. The Company incurred cash outlays of $1.7 million during the first three months of 2010 principally for lease payments, property taxes, insurance and other maintenance fees related to vacated facilities.

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 the activities in the restructuring accrual during the first quarter of 2010:

		Excess				Campus				BTL				Scopus
(In thousands)		Facilities				Consolidation				Closure				Facilities				Total
Balance at December 31, 2009		$	3,117			$	1,715			$	276			$	224			$	5,332
Provisions/(recoveries)			—				—				—				—				—
Cash payments, net of sublease income			(1,050	)			(572	)			(33	)			(42	)			(1,697	)
Balance at April 2, 2010		$	2,067			$	1,143			$	243			$	182			$	3,635

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 2, 2011. As of April 2, 2010, 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 2009 or 2010. This facility, which was amended and restated in March 2010, contains a financial covenant with the requirement for Harmonic to maintain unrestricted cash, cash equivalents and short-term investments, net of credit extensions, of not less than $35.0 million. If Harmonic is unable to maintain this cash, cash equivalents and short-term investments balance, Harmonic would not be in compliance with the facility. In the event of noncompliance by Harmonic with the covenants 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 2, 2010, 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 2, 2010). Borrowings are payable monthly and are not collateralized.

NOTE 9: FINANCING LIABILITY FOR CONSTRUCTION IN PROGRESS

In December 2009, the Company entered into a lease for a building in San Jose, California that will replace its current facility as corporate headquarters. In January 2010, the Company began a build-out of this facility and expects to incur approximately $21.5 million in construction costs. Under the terms of the lease, the landlord will reimburse up to $18.8 million of these construction costs. Because certain improvements constructed by the Company were considered structural in nature and the Company is responsible for any cost overruns, the Company

is considered to be the owner of the construction project for accounting purposes under applicable accounting guidance on the effect of lessee involvement in asset construction.

Therefore, the Company capitalized the fair value of the building of $6.9 million with a corresponding credit to financing liability. The fair value was determined as of December 31, 2009 using a combination of the sales comparison approach and the income capitalization approach. For the quarter ended April 2, 2010, the liability increased by $4.1 million primarily due to the addition of leasehold improvements. Each major construction element will be capitalized and amortized over its useful life.

Upon completion of construction, the Company will assess whether or not it qualifies for sale-leaseback accounting under applicable accounting guidance. Should the Company qualify for sale-leaseback accounting, the building and corresponding liability will be removed from the balance sheet and rental payments due over the term of the lease will be recorded as rental expense on a straight-line basis.

NOTE 10: BENEFIT PLANS

Stock Option Plans. Harmonic has reserved 13,857,000 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 have no exercise price and generally 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. Restricted stock units granted reduce the number of shares reserved for grant under the plans by two shares for every unit granted. 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 awards provide for accelerated vesting if there is a change in control. In the first quarter of 2010 and 2009, employees received restricted stock units valued at $8.7 million and $6.6 million, respectively.

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 to, among other things, increase the maximum number of shares of common stock authorized for issuance by an additional 100,000 to 800,000 shares, and to rename the Plan the “2002 Director Stock Plan.” Harmonic had a total of 396,000 shares of Common Stock reserved for issuance under the Plan as of April 2, 2010. 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, have no exercise price and vest either after one year or the vesting 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. During the three months ended April 2, 2010 and April 3, 2009, there were no restricted stock units granted to non-employee directors.

A summary of share-based award activity during the quarter ended April 2, 2010 is as follows (in thousands):

		Shares
		Available
		for Grant
Balance at December 31, 2009			4,054
Options granted			(725	)
Restricted stock units granted			(2,717	)
Restricted stock units canceled			78
Options canceled			151
Options expired			7
Balance at April 2, 2010			848

The following table summarizes restricted stock units activity under the Plans:

						Weighted
		RSUs				Average Fair Value				Aggregate Fair
(In thousands except exercise price)		Outstanding				Per Share				Value (1)
Balance at December 31, 2009			1,637			$	5.88
Restricted stock units granted			1,359				6.41
Restricted stock units released			(412	)			5.67			$	2,527
Restricted stock units canceled			(39	)			5.89
Balance at April 2, 2010			2,545				6.17

The following table summarizes stock option activity under the Plans:

		Stock Options				Weighted Average
(In thousands except exercise price)		Outstanding				Exercise Price
Balance at December 31, 2009			10,499			$	9.44
Options granted			725				6.42
Options exercised			(38	)			5.56
Options canceled			(151	)			8.38
Options expired			(69	)			87.98
Balance at April 2, 2010			10,966			$	8.77
Options vested and exercisable as of April 2, 2010			7,743			$	9.35
Options vested and expected-to-vest as of April 2, 2010			10,851			$	8.80

The weighted-average fair value of options granted for the three months ended April 2, 2010 was $3.18. The weighted-average fair value of options granted for the three months ended April 3, 2009 was $2.85.

The following table summarizes information regarding stock options outstanding at April 2, 2010:

		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 2, 2010				(Years)				Exercise Price				April 2, 2010				Exercise Price
		(In thousands, except exercise price and life)
$            0.19 -- 5.63			1,432				4.6			$	4.73				889			$	4.21
5.66 -- 6.41			2,196				4.6				6.06				1,510				5.91
6.45 -- 8.17			2,797				5.0				8.06				1,407				8.10
8.20 -- 8.93			2,105				3.9				8.36				1,656				8.39
8.95 -- 10.97			1,599				2.1				9.64				1,492				9.65
11.05 -- 23.57			698				1.3				19.92				650				20.57
31.56 -- 77.15			139				0.2				48.07				139				48.07
			10,966				4.0			$	8.77				7,743			$	9.35

The weighted-average remaining contractual life for all exercisable stock options at April 2, 2010 was 3.3 years. The weighted-average remaining contractual life of all vested and expected-to-vest stock options at April 2, 2010 was 3.9 years. The weighted-average remaining contractual life of all vested and expected-to-vest restricted stock units at April 2, 2010 was 1.8 years.

Aggregate intrinsic value of options exercisable at April 2, 2010 was $2.5 million. The aggregate intrinsic value of stock options vested and expected-to-vest net of estimated forfeitures was $2.9 million at April 2, 2010. Aggregate intrinsic value represents the difference between our closing price on the last trading day of the fiscal period, which was $6.32 as of April 2, 2010, 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 2, 2010.

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. As a result of the adoption of the 2002 Purchase Plan and subsequent amendments thereto, which amendments were approved by the Company’s stockholders, a total of 7.5 million shares have been approved for issuance pursuant to the 2002 Purchase Plan. In addition, in June 2006, the Company’s stockholders approved an amendment to the 2002 Purchase Plan to 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 2010 and 2009, the number of shares of stock issued under the purchase plans was 420,066 and 352,071 at weighted average prices of $5.07 and $5.41, respectively. The weighted-average fair value of each right to purchase shares of common stock granted under the purchase plans during the first three months of 2010 and 2009 was $1.91 and $2.26, respectively. At April 2, 2010, a total of 2,219,807 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 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 2, 2010 and April 3, 2009:

		Three Months Ended
		April 2,				April 3,
(In thousands)		2010				2009
Employee stock-based compensation in:
Cost of sales		$	478			$	338
Research and development expense			1,109				870
Selling, general and administrative expense			1,656				1,166
Total employee stock-based compensation in operating expense			2,765				2,036
Total employee stock-based compensation expense			3,243				2,374
Amount capitalized into inventory			31				22
Total stock-based compensation		$	3,274			$	2,396

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
		2010				2009				2010				2009
Expected life (years)			4.7				4.7				0.5				0.5
Volatility			57	%			60	%			50	%			74	%
Risk-free interest rate			2.5	%			1.7	%			0.4	%			0.6	%
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 11: 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 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, 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 being included in the estimated effective annual income tax rate.

For the three months ended April 2, 2010, our effective tax rate was a benefit of 115% compared to a provision of 90% for the same period a year ago, inclusive of discrete items.

For the three months ended April 2, 2010, the difference between our effective tax rate benefit of 115% and the federal statutory rate of 35% is primarily attributable to various discrete items, the differential in foreign tax rates, non deductible stock-based compensation expense, and California research and development credits. The discrete items recorded in the first quarter of 2010 principally relate to a benefit associated with the reversal of previously provided foreign income taxes due to expiration of the statute of limitations and, to a lesser extent, a benefit associated with the release of a portion of the valuation allowance on certain California deferred tax assets. The reduction in the valuation allowance on the California deferred tax assets is due to an increase in the estimated amount of income that will be apportioned to California, based on anticipated changes in the geographic mix of sales.

For the three months ended April 3, 2009, the difference between our effective tax rate of 90% and the federal statutory rate of 35% is primarily attributable to various discrete items, the differential in foreign tax rates, non deductible stock-based compensation expense, non-deductible acquisition costs related to the Scopus acquisition, and California research and development credits. The discrete items recorded in the first quarter of 2009 increased the effective tax rate by approximately 60% which is principally related to new California tax legislation, as more fully described below, net of a reversal of previously provided foreign income taxes due to expiration of the statute of limitations.

On February 20, 2009, California enacted 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 applicable accounting guidance on accounting for income taxes to compute our deferred taxes taking into account the reversal pattern and the expected California tax rate under the elective single sales factor at the end of any reporting period. For the first quarter of 2009, the impact of the new legislation resulted in a change to the state effective tax rate used to compute the Company’s California deferred tax assets resulting in a corresponding reduction to the amount of previously recorded California deferred tax assets. In addition, we recorded an additional valuation allowance on certain California tax attributes that were not expected 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.

In compliance with applicable accounting guidance for accounting for uncertainty in income taxes, the Company had gross unrecognized tax benefits, which include interest and penalties of approximately $52.3 million as of December 31, 2009, and approximately $50.0 million as of April 2, 2010. 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 $2.9 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 2, 2010, we recorded a net reduction of $0.8 million for interest and penalties related to uncertain tax positions resulting in a balance at April 2, 2010 of $4.5 million.

The tax years 2002- 2009 remain open to examination by various federal, state and foreign taxing jurisdictions to which we are subject.

NOTE 12: 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 2,				April 3,
(In thousands)		2010				2009
Potentially dilutive equity awards outstanding			11,729				12,958

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

		Three Months Ended
		April 2,				April 3,
(In thousands, except per share data)		2010				2009
Net income (loss) (numerator)		$	5,319			$	(18,843	)
Shares calculation (denominator):
Weighted average shares outstanding — basic			96,684				95,306
Effect of dilutive securities:
Potential common stock relating to equity awards outstanding			660				—
Average shares outstanding — diluted			97,344				95,306
Net income (loss) per share — basic		$	0.06			$	(0.20	)
Net income (loss) per share — diluted		$	0.05			$	(0.20	)

NOTE 13: COMPREHENSIVE INCOME (LOSS)

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

		Three Months Ended
		April 2,				April 3,
(In thousands)		2010				2009
Net income (loss)		$	5,319			$	(18,843	)
Change in unrealized gain (loss) on investments, net			(138	)			336
Foreign currency translation			(216	)			(147	)
Total comprehensive income (loss)		$	4,965			$	(18,654	)

NOTE 14: 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 product sales is summarized as follows:

Product Sales Information:

		Three Months Ended
		April 2,				April 3,
(In thousands)		2010				2009
Product sales:
Video processing		$	38,890			$	35,664
Edge and access			35,544				24,243
Service and support			10,388				7,849
Total		$	84,822			$	67,756

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 2,				April 3,
(In thousands)		2010				2009
Net sales:
United States		$	42,592			$	32,118
Japan			2,776				7,818
International			39,454				27,820
Total		$	84,822			$	67,756
Property and equipment:
United States		$	21,194			$	11,481
International			7,556				8,343
Total		$	28,750			$	19,824

Major Customers. In the first quarter of 2010, sales to Comcast accounted for 14% of net sales. In the first quarter of 2009, sales to Comcast accounted for 16% of net sales.

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 2,				April 3,
(In thousands)		2010				2009
Balance at beginning of the period		$	4,186			$	5,360
Scopus acquisition			—				2,379
Accrual for current period warranties			451				633
Warranty costs incurred			(1,211	)			(1,453	)
Balance at end of the period		$	3,426			$	6,919

Standby Letters of Credit. As of April 2, 2010, 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 $1.0 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 2, 2010.

Guarantees. As of April 2, 2010, Harmonic had no other guarantees outstanding.

NOTE 16: LEGAL PROCEEDINGS

On April 19, 2010, Arris Corporation filed a complaint in United States District Court in Atlanta, alleging that Harmonic’s Streamliner 3000 product infringes four patents held by Arris. The complaint seeks injunctive relief and damages. Harmonic has not been served in the case. Harmonic is currently evaluating its position with respect to these patents. At this time, we cannot predict the outcome of this matter. An unfavorable outcome of this matter could adversely affect our business, operating results, financial position and cash flows.

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. As a result, 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 and cash flows.

Harmonic may be subject to claims that have arisen 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.

NOTE 17: SUBSEQUENT EVENTS

On May 6, 2010, Harmonic entered into a definitive agreement to acquire Omneon Inc., a privately-held company headquartered in Sunnyvale, California and organized under the laws of Delaware. Under the terms of the Agreement and Plan of Reorganization, Harmonic would acquire Omneon for (i) $190 million in cash plus the aggregate exercise price of vested stock options of Omneon, and subject to further adjustment based on Omneon’s cash, cash equivalents and restricted cash position and working capital position at the time of closing, and (ii) 17.1 million shares of Harmonic common stock. This represents a total purchase value of approximately $274 million, based on the closing price of Harmonic common stock on May 5, 2010, net of cash to be acquired of approximately $32 million. The cash portion of the purchase price is subject to adjustment in the event that Omneon’s cash, cash equivalents and restricted cash are more or less than $32 million at closing, and is also subject to a working capital adjustment. All unvested stock options and unvested restricted stock units issued by Omneon and outstanding at closing will be assumed by Harmonic. The proposed acquisition is subject to the approval of Omneon’s stockholders, and Harmonic has entered into voting agreements with holders of approximately 66% of Omneon’s outstanding shares of capital stock, pursuant to which such Omneon stockholders agree to vote in favor of the transaction. The proposed acquisition is also subject to other customary closing conditions and regulatory approvals, and is expected to close in the third quarter of 2010.

The proposed acquisition of Omneon is intended to strengthen Harmonic’s competitive position in the digital media market and to broaden the Company’s relationships with customers who produce and distribute digital video content, such as broadcasters, cable channels and other major owners of content. The acquisition is also intended to broaden Harmonic’s technology and product lines with digital storage and play-out solutions which complement its existing video processing products.

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;
•		Our expectation that we will record a total of approximately $6.0 million in amortization of intangibles in cost of sales in the remaining nine months of 2010, excluding the impact of any amortization related to the potential Omneon acquisition;
•		Our expectation that we will record a total of approximately $1.6 million in amortization of intangibles in operating expenses in the remaining nine months of 2010, excluding the impact of any amortization related to the potential Omneon acquisition;
•		Our expectation that our capital expenditures will be in the range of $12 million to $13 million during 2010;
•		Our belief that the net proceeds from our previously 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 that we will successfully complete the announced acquisition of Omneon and we will be able to achieve the resulting benefits of the acquisition;
•		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;

•

Our expectation that the proposed acquisition of Omneon will close in the third quarter of 2010, if at all;

•

Our expectation that the acquisition of Omneon would strengthen Harmonic’s competitive position in the digital media market and broaden our relationships with customers who produce and distribute digital video content, such as broadcasters, cable channels and other major owners of content, and that it would broaden Harmonic’s technology and product lines with digital storage and play-out solutions which complement its existing video processing products; 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.

In the first quarter of 2010, Harmonic’s net sales of $84.8 million increased 25% compared to the first quarter of 2009. The increase in sales in the first quarter of 2010 compared to the corresponding period in 2009 was primarily due to increased demand from our domestic and international cable customers for products and solutions related to VOD, M-CMTS and switched digital video applications. Gross margins increased in the first quarter of 2010 compared to the corresponding period in 2009 due to higher sales volumes in 2010 and, in addition, from reduced provisions for excess and obsolete inventory which were recorded in the first quarter of 2009 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, and 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 2010 and 2009, sales to Comcast accounted for 14% and 16% of net sales, respectively.

Sales to customers outside of the U.S. in the first quarter of 2010 represented 50% of net sales, compared to 53% for the comparable period in 2009. 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 7% in the first three months of 2010 compared to 5% for the comparable period of 2009. 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.

On May 6, 2010, Harmonic entered into a definitive agreement to acquire Omneon Inc., or Omneon, a privately-held company headquartered in Sunnyvale, California and organized under the laws of Delaware. Under the terms of the Agreement and Plan of Reorganization, Harmonic would acquire Omneon for (i) $190 million in cash plus the aggregate exercise price of vested stock options of Omneon, and subject to further adjustment based on Omneon’s cash, cash equivalents and restricted cash position and working capital position at the time of closing, and (ii) 17.1 million shares of Harmonic common stock. This represents a total purchase value of approximately $274 million, based on the closing price of Harmonic common stock on May 5, 2010, net of cash to be acquired of approximately $32 million. The cash portion of the purchase price is subject to adjustment in the event that Omneon’s cash, cash equivalents and restricted cash are more or less than $32 million at closing, and is also subject to a working capital adjustment. All unvested stock options and unvested restricted stock units issued by Omneon and outstanding at closing will be assumed by Harmonic. The proposed acquisition is subject to the approval of Omneon’s stockholders, and Harmonic has entered into voting agreements with holders of approximately 66% of Omneon’s outstanding shares of capital stock, pursuant to which such Omneon stockholders agree to vote in favor of the transaction. The proposed acquisition is also subject to other customary closing conditions and regulatory approvals, and is expected to close in the third quarter of 2010.

The proposed acquisition of Omneon is intended to strengthen Harmonic’s competitive position in the digital media market and to broaden our relationships with customers who produce and distribute digital video content, such as broadcasters, cable channels and other major owners of content. The acquisition is also intended to broaden Harmonic’s technology and product lines with digital storage and play-out solutions which complement our existing video processing products.

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 Harmonic’s 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, Scopus 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.

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, 2009, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2010 and the notes to the condensed consolidated financial statements as of and for the three month period ended April 2, 2010, included herein. Our most critical accounting policies have not changed since December 31, 2009 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 goodwill or 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 2010 and the first quarter of 2009 as a percentage of net sales, are as follows:

		Three Months Ended
		April 2, 2010				April 3, 2009
Product sales			88	%			88	%
Service revenue			12				12
Net sales			100				100
Product cost of sales			48				57
Service cost of sales			4				6
Cost of sales			52				63
Gross profit			48				37
Operating expenses:
Research and development			20				21
Selling, general and administrative			24				31
Amortization of intangibles			1				1
Total operating expenses			45				53
Income (loss) from operations			3				(16	)
Interest income, net			1				2
Other expense, net			(1	)			(1	)
Income (loss) before income taxes			3				(15	)
Provision for (benefit from) income taxes			(3	)			13
Net income (loss)			6	%			(28	)%

Net Sales — Consolidated

Harmonic’s consolidated net sales in the first quarter of 2010 compared with the corresponding period in 2009 are presented in the table below. Also presented are the related dollar and percentage change in consolidated net sales in the first quarter of 2010 compared with the corresponding period in 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Product Sales Data:
Video Processing		$	38,890			$	35,664
Edge and Access			35,544				24,243
Service and Support			10,388				7,849
Net sales		$	84,822			$	67,756
Video Processing increase		$	3,226
Edge and Access increase			11,301
Service and Support increase			2,539
Total increase		$	17,066
Video Processing percent change			9.0	%
Edge and Access percent change			46.6	%
Service and Support percent change			32.3	%
Total percent change			25.2	%

Net sales increased in the first quarter of 2010 compared to the same period of 2009 principally due to increased demand from our domestic and international cable customers as well as an improved economic environment worldwide. Sales of video processing products were higher in the first quarter of 2010 compared to the same period in the prior year primarily due to increased sales of products resulting from the acquisition of Scopus. The increase in sales of products of the edge and access products line in the first quarter of 2010 compared to the same period in 2009 was primarily due to an increase in sales of edge products, such as our Narrowcast Services Gateway Edge QAM products, which are used for VOD, M-CMTS and switched digital video applications to domestic and international cable operators. The increase in sales of service and support in the first quarter of 2010 compared to the same period in 2009 was primarily from increased support revenue as a result of an expanded customer base and the timing in the renewal of pre-existing maintenance agreements.

Net Sales — Geographic

Harmonic’s domestic and international net sales in the first quarter of 2010 compared with the corresponding period in 2009 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 2010 compared with the corresponding period in 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Geographic Sales Data:
U.S.		$	42,592			$	32,118
International			42,230				35,638
Net sales		$	84,822			$	67,756
U.S. increase		$	10,474
International increase			6,592
Total increase		$	17,066
U.S. percent change			32.6	%
International percent change			18.5	%
Total percent change			25.2	%

The increased U.S. sales in the first quarter of 2010 compared to the corresponding period in 2009 were principally due to increased demand from our domestic cable customers for edge products used in VOD, M-CMTS and switched digital video and increased support revenue.

International sales in the first quarter of 2010 increased compared to the corresponding period in 2009 primarily due to increased demand from our international cable customers and sales of Scopus products. International sales increased in the first quarter of 2010 compared to the corresponding period in 2009 primarily in the European, Middle East and Canadian markets. 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 2010 as compared with the corresponding period of 2009 are presented in the table below. Also presented are the related dollar and percentage change in gross profit in the first quarter of 2010 as compared with the corresponding period in 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Gross profit		$	40,806			$	25,385
As a % of net sales			48.1	%			37.5	%
Increase		$	15,421
Percent change			60.7	%

The increase in gross profit in the first quarter of 2010 as compared to the corresponding period in 2009 was primarily due to higher sales in 2010, and a decrease in provisions totaling $6.5 million recorded in 2009 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 gross margin percentage of 48.1% in the first quarter of 2010 compared to 37.5% in the first quarter of 2009 was higher mainly due to lower provisions for excess and obsolete inventories, which were partially offset by higher freight expense. In the first quarter of 2009, the Company recorded $6.5 million to cost of sales as a result of the discontinuance of certain Scopus’ products and severance costs related to terminated employees. Additionally, the Company recorded severance costs related to terminated employees in its California operations during the first quarter of 2009, which were also included in cost of sales.

In the first quarter of 2010, $2.1 million of amortization of intangibles was included in cost of sales compared to $1.5 million in the first quarter of 2009. The higher amortization of intangible expense in the first quarter of 2010 was due to the amortization of intangibles arising from the Scopus acquisition which was completed in March 2009. We expect to record approximately $6.0 million in amortization of intangibles expenses in cost of sales in the remaining nine months of 2010 related to intangible assets acquired in connection with the acquisitions of Entone Technologies, Inc., Rhozet Corporation and Scopus Video Networks Ltd.

Research and Development

Harmonic’s research and development expense and the expense as a percentage of consolidated net sales in the first quarter of 2010, as compared with the corresponding period of 2009, 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 2010 as compared with the corresponding period of 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Research and development expense		$	16,966			$	14,496
As a % of net sales			20.0	%			21.4	%
Increase		$	2,470
Percent change			17.0	%

The increase in research and development expense in the first quarter of 2010 compared to the corresponding period in 2009 was primarily the result of increased compensation expense of $1.0 million, increased facilities expense of $0.7 million, increased outside engineering services of $0.4 million and increased stock-based compensation expense of $0.2 million. The increased compensation expense is primarily due to increased headcount related to the Scopus acquisition as well as additional hiring of employees engaged in engineering activities. The increased facilities expense is primarily due to the additional facilities, such as building leases and overhead, assumed in connection with the Scopus acquisition.

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 2010, as compared with the corresponding period of 2009, 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 2010 as compared with the corresponding period of 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Selling, general and administrative expense		$	20,845			$	21,290
As a % of net sales			24.6	%			31.4	%
Decrease		$	(445	)
Percent change			(2.1	)%

The decrease in selling, general and administrative expense in the first quarter of 2010 compared to the corresponding period in 2009 was primarily a result of lower acquisition-related expenses of $3.4 million associated with the purchase of Scopus during the first quarter of 2009, which was partially offset by increased compensation expense of $0.8 million, increased facilities expense of $0.6 million, increased stock-based compensation expense of $0.5 million, increased bad debt expense of $0.4 million and increased travel expense of $0.4 million. The increased compensation expense is primarily due to increased headcount related to the Scopus acquisition and higher commission expense resulting from increased net sales in 2010. The increased facilities expense is primarily due to the additional facilities, such as building leases and overhead, assumed in connection with the Scopus acquisition.

Amortization of Intangibles

Harmonic’s amortization of intangible assets and the expense as a percentage of consolidated net sales in the first quarter of 2010 as compared with the corresponding period of 2009 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 2010 as compared with the corresponding period of 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Amortization of intangibles		$	534			$	389
As a % of net sales			0.6	%			0.6	%
Increase		$	145
Percent change			37.3	%

The increase in the amortization of intangibles expense in the first quarter of 2010 compared to the corresponding period in 2009 was primarily due to the amortization of intangible assets obtained in connection with the acquisition of Scopus during the first quarter of 2009. Harmonic expects to record a total of approximately $1.6 million in amortization of intangibles expense in operating expenses in the remaining nine months of 2010 due to the amortization of intangible assets resulting from the acquisitions of Entone, Rhozet and Scopus.

Interest Income, Net

Harmonic’s interest income, net, and interest income, net, as a percentage of consolidated net sales in the first quarter of 2010 as compared with the corresponding period of 2009, are presented in the table below. Also presented are the related dollar and percentage change in interest income, net, in the first quarter of 2010 as compared with the corresponding period of 2009.

		Three Months Ended
(In thousands, except percentages)		April 2, 2010				April 3, 2009
Interest income, net		$	384			$	1,358
As a % of net sales			0.5	%			2.0	%
Decrease		$	(974	)
Percent change			(71.7	)%

The decrease in interest income, net, in the first three months of 2010 compared to the corresponding period of 2009 was due primarily to the lower interest rates earned on Harmonic’s cash, cash equivalents, and short-term investment portfolio balances during the first quarter of 2010.

Other Expense, Net