UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

 

Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

HARMONIC INC.

Delaware		000-25826		77-0201147
(State or other jurisdiction of incorporation or organization)		Commission File Number		(I.R.S. Employer Identification Number)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

EXPLANATORY NOTE

On September 15, 2010, Harmonic Inc., a Delaware corporation (“Harmonic”), filed a Current Report on Form 8-K (the “September 8-K”) with the Securities and Exchange Commission (the “SEC”) to report the completion of its previously announced acquisition (the “Acquisition”) of Omneon, Inc., a Delaware corporation (“Omneon”), pursuant to an Agreement and Plan of Reorganization, dated May 6, 2010, by and among Harmonic, Orinda Acquisition Corporation, a Delaware corporation and a direct, wholly-owned subsidiary of Harmonic, Orinda Acquisition, LLC, a Delaware limited liability company and a direct, wholly-owned subsidiary of Harmonic, Omneon, and Shareholder Representative Services, LLC, a Colorado limited liability company, solely in its capacity as representative, as amended (the “Agreement”).

At that time, Harmonic stated in the September 8-K that it intended to file the financial statements and pro forma financial information required by parts (a) and (b) of Item 9.01 of Form 8-K not later than seventy-one (71) calendar days after the date that the September 8-K was required to be filed with the SEC. Harmonic hereby amends the September 8-K in order to include the required financial statements and pro forma financial information.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The audited consolidated balance sheets of Omneon as of December 31, 2008 and 2009 and the related consolidated statements of operations, stockholders’ equity/deficit and cash flows for the years ended December 31, 2007, 2008 and 2009, together with the report thereon of PricewaterhouseCoopers LLP, are attached hereto as Exhibit 99.1.

The unaudited condensed consolidated balance sheets of Omneon as of December 31, 2009 and June 30, 2010, and the unaudited condensed consolidated statements of operations and cash flows for the six months ended June 30, 2009 and 2010, are filed hereto as Exhibit 99.2.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed combined balance sheet of Harmonic as of July 2, 2010 and the related pro forma condensed combined statements of operations for the six months ended July 2, 2010 and the year ended December 31, 2009, are attached hereto as Exhibit 99.3.

(d) Exhibit Index

Exhibit
Number		Description
23.1		Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
99.1		Audited Consolidated Balance Sheets of Omneon, Inc., as of December 31, 2008 and 2009 and the related Consolidated Statements of Operations, Stockholders’ Equity/Deficit and Cash Flows for the years ended December 31, 2007, 2008 and 2009
99.2		Unaudited Condensed Consolidated Balance Sheets of Omneon, Inc. as of December 31, 2009 and June 30, 2010, and the Unaudited Condensed Consolidated Statements of Operations and Cash Flows for the six months ended June 30, 2009 and 2010
99.3		Unaudited Pro Forma Condensed Combined Balance Sheet of Harmonic Inc. as of July 2, 2010 and the related Unaudited Pro Forma Condensed Combined Statements of Operations for the six months ended July 2, 2010 and the year ended December 31, 2009

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, hereunto duly authorized.

Harmonic Inc.
Dated: November 15, 2010
By:		/s/ Carolyn V. Aver
Name:		Carolyn V. Aver
Title:		Chief Financial Officer

Exhibit Index

Exhibit
Number		Description
23.1		Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
99.1		Audited Consolidated Balance Sheets of Omneon, Inc., as of December 31, 2008 and 2009 and the related Consolidated Statements of Operations, Stockholders’ Equity/Deficit and Cash Flows for the years ended December 31, 2007, 2008 and 2009
99.2		Unaudited Condensed Consolidated Balance Sheets of Omneon, Inc. as of December 31, 2009 and June 30, 2010, and the Unaudited Condensed Consolidated Statements of Operations and Cash Flows for the six months ended June 30, 2009 and 2010
99.3		Unaudited Pro Forma Condensed Combined Balance Sheet of Harmonic Inc. as of July 2, 2010 and the related Unaudited Pro Forma Condensed Combined Statements of Operations for the six months ended July 2, 2010 and the year ended December 31, 2009

Exhibit 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-169505, 333-167197, 333-159877, 333-105873, 333-91464, 333-84720, 333-59248, 333-43160, 333-86649, 333-65051, 333-136425, 333-116467 , 333-38025, 333-140935 and 333-154715) and Form S-3 (No. 333-147719, 333-141603, 333-43903, 333-44748, 333-74599, 333-84430 and 333-123823) of Harmonic, Inc. of our report dated April 28, 2010 relating to the financial statements of Omneon, Inc., which appears in the Current Report on Form 8-K/A of Harmonic, Inc. dated November 15, 2010.

/s/ PricewaterhouseCoopers LLP

San Jose, California
November 15, 2010

Exhibit 99.1

Omneon Inc
Consolidated Financial Statements
December 31, 2008 and 2009

OMNEON INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Auditors			F-2
Consolidated Financial Statements
Consolidated Balance Sheets			F-3
Consolidated Statements of Operations			F-4
Consolidated Statements of Stockholders’ Equity/(Deficit)			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Omneon, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity/deficit and of cash flows present fairly, in all material respects, the financial position of Omneon, Inc. and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
San Jose, California
April 28, 2010

OMNEON INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and per share data)

		December 31,
		2008				2009
ASSETS
Current assets:
Cash and cash equivalents		$	27,552			$	33,294
Restricted cash		$	77			$	101
Short-term investments			6,000				2,000
Accounts receivable, net			18,362				20,137
Inventory			7,006				6,930
Prepaid expenses and other current assets			4,264				4,742
Deferred income taxes			3,207				3,804
Total current assets			66,468				71,008
Property and equipment, net			10,833				8,877
Purchased intangible assets and goodwill, net			1,532				—
Capitalized software development costs, net			2,109				1,771
Other assets			2,525				3,267
Total assets		$	83,467			$	84,923
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Accounts payable		$	8,555			$	7,134
Payroll and commissions liabilities			4,399				4197
Accrued and other liabilities			8,331				3,648
Deferred revenue (net of associated costs)			7,258				12,995
Convertible preferred stock warrant liability			1,680				—
Total current liabilities			30,223				27,974
Deferred revenues (net of associated costs)			1,010				998
Other long term liabilities			1,759				1,773
Total liabilities			32,992				30,745
Convertible preferred stock:
Series A-1 Convertible Preferred Stock, $0.001 par value; 11,363,661 shares authorized, issued and outstanding at December 31, 2008 and 2009, respectively; liquidation preference—$25,000 at December 31, 2008 and 2009, respectively			12,265				12,265
Series A-2.1 Convertible Preferred Stock, $0.001 par value; 512,901 shares authorized, issued and outstanding at December 31, 2008 and 2009, respectively; liquidation preference—$2,370 at December 31, 2008 and 2009, respectively			2,370				2,370
Series A-2.2 Convertible Preferred Stock, $0.001 par value, 1 share authorized, issued and outstanding at December 31, 2008 and 2009, respectively; liquidation preference—$1,513 at December 31, 2008 and 2009, respectively			757				757
Series A-3 Convertible Preferred Stock, $0.001 par value; 27,557 shares authorized, issued and outstanding at December 31, 2008 and 2009, respectively; liquidation preference—$9,369 at December 31, 2008 and 2009, respectively			9,341				9,341
Series A-4 Convertible Preferred Stock, $0.001 par value; 21,275 shares authorized, issued and outstanding at December 31, 2008 and 2009, respectively; liquidation preference—$4,681 at December 31, 2008 and 2009, respectively			4,669				4,669
Series A-5 Convertible Preferred Stock, $0.001 par value; 99 shares authorized, issued and outstanding at December 31, 2008 and 2009, respectively; liquidation preference—$10 at December 31, 2008 and 2009, respectively			10				10
Series A-6 Convertible Preferred Stock, $0.001 par value; 479,436 shares authorized 151,703 and 444,944 shares issued and outstanding at December 31 2008 and 2009, respectively; liquidation preference— $166 and $489 at December 31, 2008 and 2009, respectively			1,599				3,047
Series B-1 Convertible Preferred Stock, $0.001 par value; 5,121,952 , shares authorized, issued and outstanding at December 31, 2008 and 2009 respectively; liquidation preference—$21,000 at December 31, 2008 and 2009, respectively			10,373				10,373
Series C-1 Convertible Preferred Stock, $0.001 par value; 1,474,587 shares authorized, 1,407,139 and 1,459,586 issued and outstanding at December 31, 2008 and 2009 respectively; liquidation preference— $40,497 and $42,007 at December 31, 2008 and 2009, respectively			20,054				21,101
Total convertible preferred stock			61,438				63,933
Commitments (See Note 5)
Stockholders’ deficit
Common stock: $0.001 par value; 38,500,000 shares authorized at December 31, 2008 and 2009, respectively, 3,298,504 and 3,579,849 shares issued and outstanding at December 31, 2008 and 2009 respectively			3				4
Additional paid-in capital			51,034				55,797
Deferred stock-based compensation			(116	)			—
Accumulated deficit			(61,896	)			(65,556	)
Accumulated other comprehensive loss			12				—
Total stockholders’ deficit			(10,963	)			(9,755	)
Total liabilities, convertible preferred stock and stockholders’ deficit		$	83,467			$	84,923

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

OMNEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

		Year Ended December 31,
		2007				2008				2009
Revenues:
Product revenues		$	81,859			$	117,232			$	91,834
Service revenues			6,406				9,010				13,600
Total revenues			88,265				126,242				105,434
Cost of revenues:
Cost of product revenues			29,231				42,072				36,364
Cost of service revenues			6,045				7,586				8,100
Total cost of revenues (1)			35,276				49,658				44,464
Gross profit			52,989				76,584				60,970
Operating expenses:
Research and development (1)			22,733				28,855				25,444
Sales and marketing (1)			26,733				32,937				30,106
General and administrative (1)			7,259				11,041				9,151
Write off of accumulated IPO costs			—				2,432				—
Asset impairment charge			—				4,376				797
Loss on sale of Castify SAS			—				—				505
Total operating expenses			56,725				79,641				66,003
Loss from operations before non-operating items and income taxes			(3,736	)			(3,057	)			(5,033	)
Interest and other income (expense), net:
Interest and other income			773				513				47
Foreign currency losses			(162	)			(101	)			(407	)
(Accretion) benefit of preferred stock warrant liability			(375	)			1,421				429
Total interest and other income (expense), net			236				1,833				69
Loss before income taxes			(3,500	)			(1,224	)			(4,964	)
Income tax (benefit) provision			(1,400	)			1,795				1,304
Net loss			(2,100	)			(3,019	)			(3,660	)
(1 Includes stock-based compensation as follows:
Total cost of revenues		$	228			$	354			$	393
Research and development			587				1,482				1,254
Sales and marketing			644				1,305				1,587
General and administrative			369				1,324				1,645

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

OMNEON INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
(in thousands)

																															Accumulated
		Convertible																	Additional				Deferred								Other				Total
		Preferred Stock									Common Stock								Paid-In				Stock based				Accumulated				Comprehensive				Stockholders’
		Shares				Amount					Shares				Amount				Capital				Compensation				deficit				Income				Equity/(Deficit)
Balance at December 31, 2006		$	17,047			$	39,785					2,529			$	3			$	45,479			$	(1,057	)		$	(56,777	)		$	—			$	(12,352	)
Issuance of common stock upon exercise of options			—				—					191				—				98				—				—				—				98
Shares of unvested common stock subject to repurchase			—				—					(33	)			—				(23	)			—				—				—				(23	)
Issuance of restricted common shares			—				—					34				—				84				—				—				—				84
Amortization of restricted common shares			—				—					—				—				7				—				—				—				7
Vesting of early-exercised stock options			—				—					256				—				71				—				—				—				71
Employee stock-based compensation expense recognized under SFAS 123(R)			—				—					—				—				1,380				—				—				—				1,380
Compensation expense resulting from extension of exercise period for Director’s options			—				—					—				—				4				—				—				—				4
Deferred stock-based compensation			—				—					—				—				(120	)			120				—				—				—
Amortization of deferred stock-based compensation, net of forfeitures			—				—					—				—				—				423				—				—				423
Issuance of Series A-6 Convertible Preferred Stock through net exercise of warrants			151				1,594					—				—				—				—				—				—				—
Issuance of Series C-1 Convertible Preferred Stock to Sony Corporation, net of issuance costs of $14,961			1,042				14,961					—				—				—				—				—				—				—
Issuance of Series C-1 Convertible Preferred Stock to purchase Castify Holdings Limited, net of issuance costs of $4,897			365				4,897					—				—				—				—				—				—				—
Amortization of Series C-1 Convertible Preferred Stock							14					—				—				—				—				—				—				—
Tax benefit from stock plan			—				—					—				—				32				—				—				—				32
Net loss			—				—					—				—				—				—				(2,100	)			—				(2,100	)
Balance at December 31, 2007			18,605				61,251					2,977				3				47,012				(514	)			(58,877	)			—				(12,376	)
Comprehensive loss:
Change in unrealized losses on investments in marketable securities			—				—					—				—				—				—				—				12				12
Net loss																												(3,019	)							(3,019	)
Total comprehensive loss			—				—					—				—				—				—				—				—				(3,007	)
Issuance of common stock upon exercise of options			—				—					294				—				106				—				—				—				106
Shares of unvested common stock subject to repurchase			—				—					(5	)							(6	)			—				—				—				(6	)
Issuance of Series A-6 Convertible Preferred Stock on exercise of warrant			1				5
Amortization of restricted common shares			—				—					—				—				84				—				—				—				84
Vesting of early-exercised stock options												33								23																23
Employee stock-based compensation expense recognized under SFAS 123(R)			—				—					—				—				3,379				—				—				—				3,379
Officer separation costs			—				—					—				—				493				—				—				—				493
Deferred stock-based compensation			—				—					—				—				(57	)			57				—				—				—
Amortization of deferred stock-based compensation, net of forfeitures			—				—					—				—				—				341				—				—				341
Reversal of issuance costs relating to Series C-1			—				—					—				—				—				—				—				—				—
Convertible Preferred Stock issued to Sony Corporation							14
Amortization of Series C-1 Convertible Preferred Stock			—				168					—				—				—				—				—				—				—
Balance at December 31, 2008			18,606				61,438					3,299				3				51,034				(116	)			(61,896	)			12				(10,963	)
Comprehensive loss:																																(12	)			(12	)
Change in unrealized losses on investments in marketable securities			—									—																(3,660	)							(3,660	)
Net loss			—									—																								(3,672	)
Total comprehensive loss																																				—
Issuance of common stock upon exercise of options			—									279				1				96				—				—				—				97
Shares of unvested common stock subject to repurchase																				(1	)			—				—				—				(1	)
Issuance of Series A-6 Convertible Preferred Stock on exercise of warrant			294				1,448					—				—								—				—				—
Amortization of restricted common shares			—				—					—				—				42				—				—				—				42
Vesting of early-exercised stock options			—				—					2				—				6				—				—				—				6
Employee stock- based compensation expense recognized under SFAS 123(R)			—				—					—				—				4,626				—				—				—				4,626
Deferred stock-based compensation			—				—					—				—				(6	)			70				—				—				64
Amortization of deferred stock-based compensation, net of forfeitures			—				—					—				—				—				46				—				—				46
Issuance of Series C-1 Convertible Preferred Stock to Castify, net			52				945					—				—				—				—				—				—				945
Amortization of Series C-1 Convertible Preferred Stock			—				102					—				—				—				—				—				—				102
Balance at December 31, 2009			18,952				63,933					3,580			$	4			$	55,797			$	—			$	(65,556	)		$	—			$	(9,755	)

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

OMNEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Year Ended December 31,
		2007				2008				2009
Cash flows from operating activities:
Net loss		$	(2,100	)		$	(3,019	)		$	(3,660	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			5,568				7,726				7,976
Stock-based compensation expense			1,828				4,465				4,879
Write off of accumulated IPO costs			—				2,432				—
Asset impairment charge			—				4,376				797
Loss on scrapping of fixed assets			63				60				493
Amortization of premium/discount on short-term investments			—				(71	)			(21	)
Amortization of lease incentive			—				(70	)			(140	)
Non-cash imputed ground rent on lease premises			—				108				—
Increase in provision for bad debts and allowance for sales returns			1,000				1,252				846
Increase in inventory provision			343				925				2,263
Accretion (benefit) of preferred stock warrant liability			375				(1,421	)			(429	)
Tax benefits from stock plan			(32	)			—				—
Loss on sale of Castify SAS			—				—				505
Changes in operating assets and liabilities:
Accounts receivable			3,952				(6,353	)			(2,621	)
Inventory			(5,004	)			(8,211	)			(5,826	)
Prepaid expenses and other current assets			(2,395	)			(2,378	)			(529	)
Other assets			31				(148	)			(202	)
Deferred income taxes			(526	)			(587	)			(1,340	)
Accounts payable			539				(524	)			(1,398	)
Accrued and other liabilities			747				4,364				(4,166	)
Deferred revenues (net of associated costs)			1,490				1,795				5,918
Net cash provided by operating activities			5,879				4,721				3,345
Cash flows from investing activities:
Purchase of property and equipment			(3,437	)			(9,016	)			(2,346	)
Cash received from landlord			—				1,200				—
Lease incentive			—				700				—
Acquisition of Castify Holdings Limited, net of cash acquired			37				—				—
Increase in restricted cash			(69	)			(1	)			(23	)
Proceeds from sale of Castify SAS			—				—				463
Maturities of short-term investments			—				8,000				22,000
Purchase of short-term investments			—				(13,917	)			(17,991	)
Net cash (used in) provided by investing activities			(3,469	)			(13,034	)			2,103
Cash flows from financing activities:
Proceeds from exercises of common stock options			98				106				97
Proceeds from exercises of warrants for Series A.6 Convertible Preferred Stock			—				—				197
Tax benefits from stock plan			32				—				—
Proceeds from issuance of Series C-1 Convertible Preferred Stock, net of issuance costs			14,961				—				—
Net cash provided by financing activities			15,091				106				294
Increase (decrease) in cash and cash equivalents			17,501				(8,207	)			5,742
Cash and cash equivalents at beginning of period			18,258				35,759				27,552
Cash and cash equivalents end of period		$	35,759			$	27,552			$	33,294
Supplemental cash flow information
Income taxes paid		$	469			$	795			$	849
Noncash financing activities
Fair value of Series C-1 Convertible Preferred Stock and common stock issued in connection with acquisition		$	4,981			$	—			$	—
Net exercise of Series A-6 Convertible Preferred Stock warrants			1,594				5				1,251
Inventory capitalized as test and demonstration equipment			3,617				2,094				2,277
Reduction of issuance costs related to Series C Convertible Preferred Stock			—				14				—
Release of Series C-1 Convertible Preferred Stock from escrow			—				—				946

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

OMNEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

     Established in 1998, Omneon, Inc. (the “Company”) is a leading provider of flexible media server and active storage systems that optimize workflow productivity and on-air reliability for the production, distribution and management of digital media.

     The Company sells its products indirectly through system integrators and directly to end user customers in the United States, Europe, the Middle East and Asia Pacific regions.

Basis of Presentation and Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The results of Castify Holdings Limited (“Castify”) have been included in the Company’s operations since December 8, 2007, the date that Castify was acquired (see Note 4) up to its disposal on July 29, 2009. Intercompany accounts and transactions have been eliminated.

Foreign Currency Translation and Transactions

     The foreign subsidiaries’ functional currency is the U.S. dollar. Gains and losses resulting from transactions denominated in foreign currencies are included within “Interest and other income (expense), net

Use of Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

     The Company considers all highly liquid investments purchased with a maturity at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist principally of U.S. government obligations, money market funds which are invested exclusively in U.S. government obligations and nominal balances in depository checking accounts that are stated at cost, which approximates fair value.

Restricted Cash

     The Company maintains a cash balance which amounted to $77,000 and $101,000 at December 31, 2008 and 2009, respectively, which is restricted from withdrawal as it relates to employee contributions for a flexible spending medical plan.

Short-term Investments

     The Company accounts for its investments in debt and equity securities under Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for Certain Investments in Debt and Equity Securities and Financial Accounting Standards Board Staff Position, or FSP, SFAS No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

     Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are carried at fair market value with unrealized gains and losses, net of taxes, reported as a separate component of stockholders’ deficit. The Company follows the guidance provided by Emerging Issues Task Force, or EITF, No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, to assess whether its investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the statements of operations.

     The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company places its cash investments in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.

Fair Value Measurements

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 became effective for the Company on January 1, 2008. The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States. The adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 was effective for the Company on January 1, 2008. However, in February 2008, the FASB released FASB Staff Position, or FSP FAS 157-2—Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 for the Company’s financial assets and liabilities did not have a material impact on its consolidated financial statements. The adoption of SFAS No. 157 for its non-financial assets and liabilities, effective January 1, 2009, did not have a material impact on its consolidated financial statements.

     As defined in SFAS No. 157, fair value is based on 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. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

     Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

     Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

     Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

     In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value.

     Financial assets carried at fair value as of December 31, 2009 are classified in the table below in one of the three categories described above (in thousands):

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

		Level 1				Level 2				Level 3				Total
Assets
Cash and cash equivalents (1)		$	33,294			$	—			$	—			$	33,294
Restricted cash			101				—				—				101
Short-term investments (2)			2,000				—				—				2,000
Total assets at fair value		$	35,395			$	—			$	—			$	35,395

Certain Risks and Concentrations

     Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments, restricted cash and accounts receivable. Cash and cash equivalents and short-term investments are deposited with financial institutions that management believes are creditworthy. Deposits with financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of its cash and cash equivalents.

     The Company uses derivatives, such as foreign currency options and forwards to hedge exposure to the Japanese Yen receipts arising from sales to its Japan-based customers.

     The Company’s accounts receivable are derived from customers primarily located in the United States of America, Europe and the Asia Pacific region and are denominated in U.S. dollars and Japanese Yen. The Company performs ongoing credit evaluations of its customers’ financial condition, generally does not require collateral and establishes an allowance for doubtful accounts based upon the expected collectability of accounts receivable.

     No customer accounted for more than 10% of the Company’s total accounts receivable at December 31, 2008. Time Warner accounted for 13% of the Company’s total accounts receivable as of December 31, 2009. No other customers accounted for more than 10% of the Company’s total accounts receivable at December 31, 2009.

     No customer accounted for more than 10% of the Company’s total revenues during the years ended December 31, 2007, 2008 and 2009.

     The Company receives certain of its critical components from sole source suppliers. Additionally, the Company relies on three primary vendors to provide contract manufacturing and assembly services for its products. The inability of these contract manufacturers and assembly service suppliers to fulfill the Company’s supply requirements could materially affect future operating results.

Inventory

     Inventory includes finished goods, purchased components and spares and is carried at the lower of cost or market, with cost being determined on a first-in, first-out basis. The Company records provisions to reduce the carrying value of inventories to their net realizable value when the Company believes that the net realizable value is less than cost. The Company also records provisions for excess and obsolete inventories based on forecasted demand. The recording of these provisions establishes a new and lower cost basis for each specifically identified inventory item, and the Company does not restore the cost basis to its original level regardless of any subsequent changes in facts and circumstances.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

Property and Equipment

     Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally two to five years and 40 years for buildings. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Major additions and improvements are capitalized, while replacements, repairs and maintenance that do not extend the life of the asset are charged to operations.

Warranty Accrual

     The Company offers warranties on certain products and records a liability for the estimated future costs associated with warranty claims, which is based upon historical experience and the Company’s estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of revenues and are recorded at the time that revenue is recognized. A reconciliation of the changes in the Company’s warranty accrual follows:

		December 31,
(in thousands)		2008				2009
Warranty accrual, beginning of year		$	1,515			$	1,664
Accruals for warranties issued during the year			1,161				903
Expenses incurred during the year			(1,012	)			(1,344	)
Warranty accrual, end of year		$	1,664			$	1,223

Revenue Recognition

     For sales of the Company’s products where software is incidental to the functionality of the product, the Company applies the provisions of Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, and SAB No. 104, Revenue Recognition, and all related interpretations. For sales of the Company’s products where software is not incidental to the functionality of the product, the Company accounts for revenues in accordance with Statement of Position, or SOP, No. 97-2, Software Revenue Recognition and all related interpretations.

     The Company derives the majority of its revenues from sales of servers and storage systems, with the remaining revenues generated primarily from service fees relating to the maintenance contracts on its products. The Company generally recognizes product revenues at the time of shipment, provided that persuasive evidence of an arrangement exists, title and risk of loss pass to the customer, the price is fixed or determinable and collection of the receivable is reasonably assured.

     The Company generally ships its products ex-works, which requires the buyer to bear the risks for bringing the goods to the buyer’s final destination. Title to the Company’s products and risk of loss generally passes upon delivery to the common carrier.

     In assessing whether prices or fees are fixed or determinable, the Company considers the payment terms of the transaction and the Company’s collection experience in similar transactions. If a significant portion of the price or fee is due after normal payment terms, revenue is recognized when payment becomes due and payable from the customer, provided that all other revenue recognition criteria are met.

     In instances where the Company is required to obtain customer acceptance, revenues are deferred until the terms of acceptance are satisfied. Arrangements with acceptance provisions generally provide the customer time to integrate the product into their environment and allow specification and performance testing. The Company determines that acceptance has occurred upon receipt of a signed and dated acceptance document from the customer or lapse of the acceptance period. Arrangements with acceptance provisions occur infrequently and can be made to either indirect or direct customers.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

     Most of the Company’s sales, including those to indirect customers, do not include rights of return. However, in limited cases, the Company has accepted product returns from customers, and in 2007, the Company established an allowance for future sales returns based on historical trends in product return rates. The allowance for future sales returns as of December 31, 2008 and 2009 was $827,000 and $479,000, respectively. The Company’s indirect customers generally do not maintain any inventory and only order products from the Company when their end-user customer has committed to the purchase.

     The terms and conditions of sales granted to indirect customers and direct end users are generally the same. Orders received from indirect customers are considered on a standalone basis and the terms and conditions of such orders are independent of the arrangement made with the indirect customer’s end user. There are no contractual provisions allowing indirect customers restocking rights. Indirect customers are evaluated for creditworthiness under the same guidelines as direct end-user customers. The Company does not allow payment from indirect customers to be dependent upon receipt of payment from the end user.

     Revenues from service obligations under maintenance contracts are deferred and recognized ratably over the contractual service period. Service maintenance contracts typically range from one to two years.

     In accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables, where sales arrangements involve multiple elements, the entire revenue is allocated to each respective element based on its relative fair value when it exists for all elements and recognized when the revenue recognition criteria for each element have been met. When fair value does not exist for all elements, the Company uses the residual value method to recognize revenues when an arrangement includes one or more elements to be delivered at a future date and objective and reliable evidence of the fair value of all the undelivered elements exists.

     In accordance with SOP 97-2 and EITF 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental-Software, for the sale of products that contain software that is more than incidental to the sale of the hardware, the Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is reasonably assured. In instances where there are undelivered elements that did not have vendor-specific objective evidence, or VSOE, of fair value, revenues are deferred until VSOE is established or those elements have been delivered. The Company has established VSOE for post contract support as evidenced by the actual sales price of the renewals, and for other services by the actual sales price of the service when it is sold on a stand-alone basis.

Shipping and Handling

     The Company classifies amounts billed to customers for shipping and handling as revenues. Costs incurred by the Company for shipping and handling have been classified as cost of revenues.

Advertising Costs

     The Company expenses advertising costs as incurred. The Company incurred $439,000, $534,000 and $447,000 of advertising expense during the years ended December 31, 2007, 2008 and 2009, respectively.

Income Taxes

     The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future change in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

     On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. Prior to the adoption, the Company’s policy was to establish reserves that reflected the probable outcome of known tax contingencies. The effects of the resolution, if any, were recognized as changes to the effective income tax rate in the period of resolution. Under FIN 48 the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement.

     The adoption of FIN 48 resulted in a reclassification of certain tax liabilities from current to non-current and had no cumulative impact to accumulated deficit. As of December 31, 2009 the Company had $1.8 million of liabilities for unrecognized tax benefits. Of this amount $1.0 million, if realized, would impact net income.

Research and Development Costs

     Research and development costs are expensed as incurred. With respect to software that is embedded in the Company’s servers and storage systems and the Company’s related applications, software development costs incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. After technological feasibility is established, material software development costs are capitalized. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or in the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility, which the Company has defined as the establishment of a working model, which typically occurs when the beta testing commences, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.

Stock-Based Compensation

     The Company grants options to purchase common stock to employees with exercise prices equal to the fair value of the underlying stock, as determined by the board of directors on the date the equity award is granted. The board of directors determines the fair value of the underlying stock by considering a number of factors, including historical and projected financial results, the risks the Company faces at the time, the preferences of the Company’s preferred stockholders and the lack of liquidity of the Company’s common stock.

     The Company recognized stock-based compensation expense of $1.4 million, $3.4 million and $4.8 million in the years ended December 31, 2007, 2008 and 2009, respectively.

     In connection with the calculation of stock-based compensation under SFAS 123(R), the Company reviews and updates, among other things, its forfeiture rate, expected term and volatility assumptions. In determining the expected term of options, the Company gives consideration to historical exercises, the vesting term and the cancellation history of the Company’s options and the options’ contractual term of ten years. Estimated volatility also reflects the application of SAB No. 107, Share-Based Payment, and interpretive guidance and, accordingly, incorporates historical volatility of similar entities whose share prices are publicly available. The fair value of each option is estimated on the date of grant using the Black-Scholes method using the following assumptions:

		Year ended December 31,
		2007				2008				2009
Expected life (in years)			6.0				6.0				6.0
Interest rate range		3.50% to 4.85		%		1.59% to 3.41		%		1.88% to 3.00		%
Volatility		45% to 50		%			50	%			50	%
Dividend yield			—				—				—

     As of December 31, 2008 and 2009, there was $10.9 million and $16.2 million, respectively, of unrecognized compensation related to stock options granted after January 1, 2006, which is expected to be recognized over the remaining weighted-average service period of 3.3 years and 3.1 years, respectively.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

Comprehensive Loss

     Comprehensive loss generally represents all changes in stockholders’ deficit except those resulting from investments or contributions by stockholders. Comprehensive loss was the same as net loss in the year ended December 31, 2007. For the years ended December 31, 2008 and 2009, comprehensive loss consisted of unrealized losses on marketable securities and net loss.

Goodwill and Other Intangible Assets

     In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is reviewed for impairment annually or more frequently if facts and circumstances warrant a review. The provisions of SFAS No. 142 require that a two-step test be performed to assess goodwill for impairment. First, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.

     SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

     The Company amortizes acquired intangible assets with definite lives, which are generally five to eight years. See Note 4.

Impairment of Long-Lived Assets

     The Company reviews long-lived assets for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the undiscounted future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the use of the asset.

Convertible Preferred Stock Warrant Liability

     The Company accounts for warrants issued in connection with financing arrangements in accordance with FSP 150-5. Pursuant to FSP 150-5, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required be classified as a liability. The fair value of warrants classified as liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded in current period earnings.

     In October 2007, warrants for 152,140 shares of the Company’s Series A-6 Convertible Preferred Stock were net exercised, resulting in the issuance of 150,703 shares of the Company’s Series A-6 Convertible Preferred Stock. As a result of this net exercise, the Company reclassified $1.6 million from Convertible Preferred Stock Warrant Liability to Convertible Series A-6 Preferred Stock on its consolidated balance sheet.

     In September 2009, warrants for 147,831 shares of the Company’s Series A-6 Convertible Preferred Stock were net exercised and warrants for 178,919 shares were exercised for cash, resulting in the total issuance of 293,753 shares of the Company’s Series A-6 Convertible Preferred Stock. The Company does not have any Convertible Preferred Stock Warrant Liability as of December 31, 2009 as there are were no outstanding warrants for Convertible Preferred Stock.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

Recent Accounting Pronouncements

     In June 2009, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 168”). SFAS No. 168 replaces the GAAP hierarchy with two levels: authoritative and nonauthoritative. The FASB Accounting Standards Codification (“Codification”) became the single source of authoritative nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”). The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative.

     Following the Codification, FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead it will issue Accounting Standards Updates (“ASU”), which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on changes to the Codification.

     GAAP is not intended to be changed as a result of the FASB’s Codification project, but it will change the way guidance is organized and presented. The Company has adopted the provisions of this guidance and as a result it will only affect the specific references to GAAP literature in the notes to its consolidated financial statements.

     In April 2009, the FASB issued an update to ASC 820, “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”, which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. This update to ASC 820 was effective for interim and annual periods ending after June 15, 2009 and will be adopted by the Company in 2010. The Company does not expect the adoption of this guidance will have a material effect on its consolidated results of operations and financial condition.

     In April 2009, the FASB issued ASC 320, “Recognition and Presentation of Other-Than-Temporary Impairments”, which will be effective for the Company beginning in 2010. ASC 320 amends existing guidance for determining whether an other than temporary impairment of debt securities has occurred. Among other changes, the FASB replaced the existing requirement that an entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert (a) it does not have the intent to sell the security, and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company does not expect the adoption of this guidance will have a material effect on its consolidated results of operations and financial condition.

     In September 2009, FASB amended the ASC as summarized in ASU 2009-13, “Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements.” Guidance in ASC 605-25 on revenue arrangements with multiple deliverables has been amended to require an entity to allocate revenue to deliverables in an arrangement using its best estimate of selling prices if the vendor does not have vendor-specific objective evidence or third-party evidence of selling prices, and to eliminate the use of the residual method and require the entity to allocate revenue using the relative selling price method. The new guidance also requires expanded quantitative and qualitative disclosures about revenue from arrangements with multiple deliverables. The update is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis for new revenue arrangements entered into after adoption of the update, or by retrospective application. The Company is assessing the potential impact of the update on its consolidated financial statements and is planning to adopt the update effective January 1, 2011.

     In October 2009, the FASB issued ASC 985-605 Certain Revenue Arrangements that Include Software Elements (ASC 985-605). ASC 985-605 provides additional guidance on how to determine which software, if any, relating to the tangible product would be excluded from the scope of the software revenue guidance in ASC 985-605. ASC 985-605 is effective for financial statements issued for fiscal years beginning on or after June 15, 2010, and interim periods within those fiscal years. The Company is assessing the potential impact of the update on its consolidated financial statements and is planning to adopt the update effective January 1, 2011.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

     In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements.” This update will require (1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (2) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements for related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The Company is still assessing the impact on this guidance and does not believe the adoption of this guidance will have a material impact to its consolidated financial statements.

     Management does not believe that other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the SEC have a material impact on the Company’s present or future consolidated financial statements.

NOTE 2 — SHORT-TERM INVESTMENTS

     Short-term investments consist of the following:

						Gross				Gross
		Cost				Unrealised				Unrealised				Fair
(In thousands)		Basis				Gains				Losses				Value
Balance at December 31, 2008							—				—
U.S. government agency securities		$	5,988			$	12			$	—			$	6,000
Total short-term investments		$	5,988			$	12			$	—			$	6,000
Balance at December 31, 2009			—				—				—
U.S. government agency securities		$	2,000			$	—			$	—			$	2,000
Total short-term investments		$	2,000			$	—			$	—			$	2,000

     The cost basis and fair value of short-term investments, by contractual maturity, are presented below:

		Cost				Fair
(In thousands)		Basis				Value
As of December 31, 2008
One year or less		$	5,988			$	6,000
Total short-term investments		$	5,988			$	6,000
As of December 31, 2009
One year or less		$	2,000			$	2,000
Total short-term investments		$	2,000			$	2,000

     As of December 31, 2008 and 2009, all of the Company’s short-term investments were classified as available-for-sale and all investments had contractual maturities of less than one year. Accordingly, all short-term investments are classified as current assets on the consolidated balance sheets.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

     The Company invests in securities that are rated investment grade or better. Unrealized gains and losses are recorded as a component of cumulative other comprehensive income (loss) in stockholders’ equity. If these investments are sold at a loss or are considered to have other than temporary declines in value, a charge to operations is recorded. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in other income (expense), net. There were no realized gains or losses recorded during the years ended December 31, 2008 and 2009.

NOTE 3 — BALANCE SHEET COMPONENTS

		December 31,
(in thousands)		2008				2009
Accounts receivable
Accounts receivable, gross		$	19,582			$	20,942
Allowance for doubtful accounts			(393	)			(326	)
Allowance for sales returns			(827	)			(479	)
Accounts receivable, net		$	18,362			$	20,137

		Balance at
		beginning of				Charged to								Balance at
(in thousands)		period				expenses				Write-off				end of period
Allowance for doubtful accounts
Year ended December 31, 2007			369				13				(72	)			310
Year ended December 31, 2008			310				102				(19	)			393
Year ended December 31, 2009			393				—				(67	)			326

		Balance at				Increase in
		beginning of				allowance offset								Balance at
(in thousands)		period				against revenues				Write-off				end of period
Allowance for sale returns
Year ended December 31, 2007			—				987				(238	)			749
Year ended December 31, 2008			749				1,150				(1,072	)			827
Year ended December 31, 2009			827				846				(1,194	)			479

		December 31,
(in thousands)		2008				2009
Inventory
Finished goods		$	3,617			$	2,437
Purchased components			3,005				3,332
Spares inventory			2,173				2,576
Total Inventory			8,795				8,345
Less: Long-term inventory			(1,789	)			(1,415	)
Inventory		$	7,006			$	6,930

     Depreciation and amortization of spares inventory amounted to $260,000, $627,000 and $1,242,000 for the years ended December 31, 2007, 2008 and 2009, respectively.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

     Long-term inventory represents last time purchases of certain components which the Company’s suppliers have elected to discontinue producing and which are forecasted to be used outside of one year from the balance sheet date. The balances of $1.8 million and $1.4 million are included in “Other Assets” on the balance sheet as of December 31, 2008 and 2009, respectively.

		Estimated
		useful life				December 31,
(in thousands)		(years)				2008				2009
Property and equipment
Computer equipment			2			$	12,828			$	14,132
Engineering and development equipment			3				7,950				9,086
Software			2-5				3,384				3,900
Demonstration units			2				1,590				1,590
Furniture and office equipment			5				1,381				1,367
Leasehold improvements			6				3,091				3,268
Construction in progress							36				78
Property and equipment, gross							30,260				33,421
Less: Accumulated depreciation and amortization							(19,427	)			(24,544	)
Property and equipment, net						$	10,833			$	8,877

     Depreciation and amortization expense on property, plant and equipment was $5.3 million, $6.8 million and $6.6 million for the years ended December 31, 2007, 2008 and 2009, respectively.

		December 31,
(in thousands)		2008				2009
Goodwill
Balance, beginning of the year		$	3,878			$	692
Additions to goodwill			946				—
Impairment charge			(4,132	)			(692	)
Balance, end of the year		$	692			$	—

		December 31,
(in thousands)		2008				2009
Accrued and other liabilities
Warranty accrual		$	1,664			$	1,223
Accrued taxes payable			1,240				491
Customer deposits			3,316				947
Castify consideration to be issued			946				—
Other			1,165				987
Accrued liabilities		$	8,331			$	3,648

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 4 — ACQUISITION AND RELATED INTANGIBLES

Castify Holdings Limited

     On December 8, 2007, the Company acquired 100% of the outstanding shares of Castify, a privately held company incorporated in England and Wales. Castify owns 100% of Castify SAS, a company incorporated in France, which provides a software based solution for managing the distribution of digital content over the Internet and private Intranets. Castify’s end-to-end software solution enables enterprises and service providers to build scalable, easy-to-manage, and cost-efficient service delivery platforms for content distribution over public and private networks.

     The Company accounted for the acquisition under the purchase method of accounting in accordance with the provisions of SFAS No. 141. Under this accounting method, the Company recorded the assets acquired and liabilities assumed at their estimated fair value, with the excess purchase price reflected as goodwill. Additionally, certain costs directly related to the merger were reflected as additional purchase price in excess of net assets acquired. The results of operations of Castify since December 8, 2007 have been included in the Company’s consolidated financial statements.

Purchase Price

     Under the terms of the agreement to acquire Castify, the Company agreed to issue up to 383,946 shares of Series C-1 Convertible Preferred Stock, or Series C-1, to Castify’s investor shareholders, up to 45,171 shares of Series C-1 to Castify’s three founding shareholders and up to 34,103 shares of common stock to certain key employees of Castify. The shares issued to the investor shareholders and three founding shareholders were subject to a 15% holdback which was to be held by the Company for a period of one year from the acquisition date in order to cover contingencies arising from certain indemnification obligations of the Castify shareholders. The fair value of approximately $946,000 for these shares were recorded as additional goodwill when the contingencies were resolved. The additional shares were not issued as of December 31, 2008; therefore the fair value of the shares to be issued was included in accrued and other liabilities as of December 31, 2008. During 2009, these shares were issued to the shareholders and no further liability exists as of December 31, 2009.

     The fair value of the 429,117 shares of the Company’s Series C-1 used to acquire Castify was $14.80 per share, which was the fair value as determined by the Company’s board of directors at the measurement date. The fair value of the 34,103 shares of the Company’s restricted common stock issued to key employees of Castify was $9.84 per share, which was the fair value as determined by the Company’s board of directors at the measurement date.

     The total purchase price of the Castify acquisition was $6.3 million. The total purchase price included the following components (in thousands):

Fair value of Castify Series C-1 issued		$	4,897
Fair value of Castify restricted common stock issued			84
Total preliminary purchase price			4,981
Direct transaction costs			393
Fair value of Castify Series C-1 to be issued			946
Total purchase price		$	6,320

     The shares issued to the three founding shareholders and the key employees were subject to vesting terms whereby 25% of the shares were fully vested on the date of acquisition and the remaining 75% vest ratably over 36 months. Consequently, 33,878 shares of Series C-1 preferred stock and 25,577 shares of common stock were subject to vesting and were contingent upon continuous employment of the individual. The fair value of the unvested portion of these shares, approximately $753,000, was accounted for as compensation expense and will be amortized over the remaining vesting period.

OMNEON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

Purchase Price Allocation

     The allocation of the purchase price to Castify’s tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition as determined by the Company’s management. The Company was responsible for determining the valuation of the intangible assets acquired, and these estimates and assumptions were subject to change. As of the acquisition date, Castify had approximately $12.0 million of operating loss carryforwards in France. As a result of Castify’s historical loss position, the Company recorded a valuation allowance of $3.6 million, net of deferred tax liabilities, against the deferred tax asset associated with these carryforwards, which the Company believed would, more than likely, not be utilized.

     The following table allocates the purchase price based on the fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

		As of
		December 8,				Estimated
		2007				Useful Life
Tangible assets and liabilities
Current assets		$	372
Long-term assets			44
Current liabilities			(742	)
Total net liabilities			(326	)
Amortizable intangible assets
Developed technology			830			5 years
Customer relationships			600			7 years
Total amortizable net tangible assets			1,430
Goodwill			4,890
Total		$	6,320