UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Delaware		77-0201147
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 96,103,781 on July 31, 2009.

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(In thousands, except par value amounts)		July 3, 2009				December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents		$	125,677			$	179,891
Short-term investments			126,940				147,272
Accounts receivable, net of allowances of $6,529 and $8,697			64,503				63,923
Inventories			34,363				26,875
Deferred income taxes			36,384				36,384
Prepaid expenses and other current assets			16,369				15,985
Total current assets			404,236				470,330
Property and equipment, net			19,759				15,428
Goodwill			63,662				41,674
Intangibles, net			31,524				12,069
Other assets			18,856				24,862
Total assets		$	538,037			$	564,363
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	13,910			$	13,366
Income taxes payable			4,926				1,434
Deferred revenue			30,834				29,909
Accrued liabilities			38,744				50,490
Total current liabilities			88,414				95,199
Accrued excess facilities costs, long-term			1,906				4,953
Income taxes payable, long-term			42,558				41,555
Other non-current liabilities			5,407				8,339
Total liabilities			138,285				150,046
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued			—				—
Common stock, $0.001 par value, 150,000 shares authorized; 96,096 and 95,017 shares issued and outstanding			96				95
Capital in excess of par value			2,274,237				2,263,236
Accumulated deficit			(1,875,157	)			(1,848,394	)
Accumulated other comprehensive income (loss)			576				(620	)
Total stockholders’ equity			399,752				414,317
Total liabilities and stockholders’ equity		$	538,037			$	564,363

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

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three Months Ended								Six Months Ended
(In thousands, except per share amounts)		July 3, 2009				June 27, 2008				July 3, 2009				June 27, 2008
Product sales		$	70,513			$	82,409			$	130,420			$	162,557
Service revenue			10,780				6,931				18,629				14,060
Net sales			81,293				89,340				149,049				176,617
Product cost of sales			43,458				42,831				82,140				84,948
Service cost of sales			4,288				3,657				7,977				6,538
Total cost of sales			47,746				46,488				90,117				91,486
Gross profit			33,547				42,852				58,932				85,131
Operating expenses:
Research and development			15,450				13,347				29,946				26,540
Selling, general and administrative			20,735				20,022				42,026				37,470
Amortization of intangibles			1,534				160				1,922				320
Total operating expenses			37,719				33,529				73,894				64,330
Income (loss) from operations			(4,172	)			9,323				(14,962	)			20,801
Interest income, net			823				2,245				2,181				5,262
Other income (expense), net			(188	)			(358	)			(682	)			(572	)
Income (loss) before income taxes			(3,537	)			11,210				(13,463	)			25,491
Provision for (benefit from) income taxes			4,382				(14,254	)			13,300				(13,327	)
Net income (loss)		$	(7,919	)		$	25,464			$	(26,763	)		$	38,818
Net income (loss) per share
Basic		$	(0.08	)		$	0.27			$	(0.28	)		$	0.41
Diluted		$	(0.08	)		$	0.27			$	(0.28	)		$	0.41
Weighted average shares
Basic			95,703				94,229				95,563				94,143
Diluted			95,703				95,198				95,563				95,128

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

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

		Six Months Ended
		July 3,				June 27,
(In thousands)		2009				2008
Cash flows from operating activities:
Net income (loss)		$	(26,763	)		$	38,818
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of intangibles			5,645				3,204
Depreciation			4,090				3,467
Stock-based compensation			4,943				3,250
Excess tax benefits from stock-based compensation			—				(2,033	)
Net loss on disposal of fixed assets			187				9
Deferred tax assets			—				(15,098	)
Other non-cash adjustments, net			1,563				(1,274	)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net			5,573				10,029
Inventories			8,415				2,133
Prepaid expenses and other assets			8,214				2,816
Accounts payable			(2,419	)			(9,358	)
Deferred revenue			274				(13,246	)
Income taxes payable			4,200				850
Accrued excess facilities costs			(2,806	)			(3,171	)
Accrued and other liabilities			(24,237	)			(3,777	)
Net cash provided by (used in) operating activities			(13,121	)			16,619
Cash flows from investing activities:
Purchases of investments			(70,221	)			(53,439	)
Proceeds from maturities and sales of investments			92,079				80,545
Acquisition of property and equipment, net			(3,775	)			(4,075	)
Acquisition of Rhozet			(453	)			(2,828	)
Acquisition of Scopus			(63,053	)			—
Net cash provided by (used in) investing activities			(45,423	)			20,203
Cash flows from financing activities:
Proceeds from issuance of common stock, net			4,185				4,856
Excess tax benefits from stock-based compensation			—				2,033
Net cash provided by financing activities			4,185				6,889
Effect of exchange rate changes on cash and cash equivalents			145				(48	)
Net increase (decrease) in cash and cash equivalents			(54,214	)			43,663
Cash and cash equivalents at beginning of period			179,891				129,005
Cash and cash equivalents at end of period		$	125,677			$	172,668
Supplemental disclosure of cash flow information:
Income tax payments, net		$	2,414			$	952
Non-cash investing and financing activities:
Issuance of restricted common stock for Rhozet acquisition		$	1,870			$	—

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

HARMONIC INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” the “Company” or “we”) considers necessary for a fair presentation of the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 2, 2009. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2009, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter which ends on December 31.

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

The Company has evaluated subsequent events through August 11, 2009, which represents the date the financial statements were issued.

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

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

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

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

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the

valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and has been adopted by us in the first quarter of fiscal 2009. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedge items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition.

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

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

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

	•		FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.
	•		FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, and is applicable to all assets and liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures.
	•		FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 provides additional

guidance to provide greater clarity about the credit and noncredit component of another-than-temporary impairment event and to more effectively communicate when another-than-temporary impairment event has occurred. This FSP applies to debt securities.

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

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective in the first interim period ending after June 15, 2009 and the required disclosure is included in Note 1.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting” (“SFAS 168”). SFAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy established under SFAS 162. On July 1, 2009 the FASB launched FASB’s new Codification titled “The FASB Accounting Standards Codification.” The Codification will supersede all existing non-SEC accounting and reporting standards. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This pronouncement will have no effect on our unaudited condensed consolidated financial statements upon adoption other than references to GAAP will be changed.

NOTE 3: SCOPUS ACQUISITION

On March 12, 2009, Harmonic completed the acquisition of 100% of the equity interests of Scopus Video Networks Ltd., or Scopus, a publicly traded company based in Israel. Scopus engages in the development and support of digital video networking products that allow network operators to transmit, process, and manage digital video content. Scopus’ primary products include integrated receivers/decoders (“IRD”), intelligent video gateways (“IVG”), and encoders. In addition, 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. In addition, the acquisition provides an assembled workforce, the implicit value of future cost savings as a result of combining entities, and is expected to provide Harmonic with future unidentified new products and technologies, These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Scopus’s net tangible and intangible assets acquired resulting in goodwill of approximately $21.7 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. We also incurred a total of $3.4 million of transaction expenses, which were expensed as selling, general and administrative expenses in the first quarter of 2009.

The assets and liabilities of Scopus were recorded at fair value at the date of acquisition. We will recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period shall not exceed one year from the acquisition date. Further, any associated restructuring activities will be expensed in future periods and not recorded through purchase accounting as previously done under SFAS 141. Subsequent to the acquisition, we recorded expenses of $7.8 million in the six month period ended July 3, 2009, primarily for excess and obsolete inventories related to product discontinuances and severance costs.

The results of operations of Scopus are included in Harmonic’s Condensed Consolidated Statements of Operations

from March 12, 2009, the date of acquisition. The following table summarizes the allocation of the purchase price based on the fair value of the assets acquired and the liabilities assumed at the date of acquisition:

(In thousands)
Cash acquired		$	23,316
Investments			1,899
Accounts receivable (Gross amount due from accounts receivable of $6,789)			6,120
Inventory			15,899
Fixed assets			4,833
Other tangible assets acquired			2,312
Intangible assets:
Existing technology			10,100
In-process technology			2,400
Patents/core technology			3,500
Customer contracts and related relationships			4,000
Trade names/trademarks			2,100
Order backlog			2,000
Maintenance agreements and related relationships			1,000
Goodwill			21,696
Total assets acquired			101,175
Accounts payable			(2,963	)
Deferred revenue			(336	)
Other accrued liabilities			(11,507	)
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 the March 12, 2009. We used an overall discount rate of 16% to estimate the fair value of the intangible assets acquired, which was derived based on financial metrics of comparable companies operating in Scopus’ industry. In determining the appropriate discount rates to use in valuing each of the individual intangible assets, we adjusted the weighted average cost of capital of 16% giving consideration to the specific risk factors of each asset. The following methods, using SFAS 157 as the framework for measuring fair value, were used to value the identified intangible assets:

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

	•		The fair value of the maintenance agreements and related relationships assets acquired were based on the Income Approach;
	•		The fair value of trade names/trademarks assets acquired were established based on the Profit Allocation Method, and
	•		The fair value of backlog acquired was established based on the “Cost Savings Approach.”

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

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

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

The residual purchase price of $21.7 million has been recorded as goodwill. The goodwill as a result of this acquisition is not expected to be deductible for tax purposes. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill relating to the acquisition of Scopus is not being amortized and will be tested for impairment annually or whenever events indicate that an impairment may have occurred.

The following unaudited pro forma financial information presented below summarizes the combined results of operations as if the merger had been completed on January 1, 2008. The unaudited pro forma financial information for the three and six months ended June 27, 2008 combines the results for Harmonic for the three and six months ended June 27, 2008, and the historical results of Scopus for the three and six months ended June 30, 2008. The unaudited pro forma financial information for the six months ended July 3, 2009 combines the results for Harmonic for the six months ended July 3, 2009 with the results of Scopus through March 12, 2009, the acquisition date. The pro forma financial information is presented for informational purposes only and does not purport to be indicative of what would have occurred had the merger actually been completed on such date or of results which may occur in the future.

		Three Months Ended				Six Months Ended
(In thousands, except per share data)		June 27, 2008				June 27, 2008				July 3, 2009
Net sales		$	108,371			$	211,724			$	153,377
Net income (loss)		$	22,776			$	22,530			$	(37,328	)
Net income (loss) per share — basic		$	0.24			$	0.24			$	(0.39	)
Net income (loss) per share — diluted		$	0.24			$	0.24			$	(0.39	)

For the three month period ended July 3, 2009, Scopus products contributed revenues of $5.9 million and a net loss of $3.9 million. For the period from March 12, 2009 to July 3, 2009, Scopus products contributed revenues of $7.4 million and a net loss of $12.1 million.

NOTE 4: FAIR VALUE

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

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

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

The Company uses the market approach to measure fair value of its financial assets and liabilities on a recurring basis. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. During the three and six months ended July 3, 2009, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

In accordance with SFAS 157, the following table represents Harmonic’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of July 3, 2009:

(In thousands)		Level 1				Level 2				Level 3				Total
July 3, 2009
Money market funds		$	81,237			$	¾			$	¾			$	81,237
U.S. corporate debt			¾				49,299				¾				49,299
U.S. government and state agencies			¾				75,464				¾				75,464
Other debt securities			¾				2,177				¾				2,177
		$	81,237			$	126,940			$	¾			$	208,177
Forward exchange contracts			¾				205				¾				205
Total assets		$	81,237			$	127,145			$	¾			$	208,382

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

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

The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the three and six month periods ended July 3, 2009 and June 27, 2008:

		Three Months Ended								Six Months Ended
(in thousands)		July 3, 2009				June 27, 2008				July 3, 2009				June 27, 2008
Beginning Balance		$	—			$	26,733			$	10,732			$	—
Transfers in to (out of) Level 3			—				—				—				34,863
Purchases and sales, net			—				(12,289	)			(10,732	)			(20,419	)
Unrealized gain recorded in “Other comprehensive income”			—				64				—				64
Ending Balance		$	—			$	14,508			$	—			$	14,508

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

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
(In thousands)		Cost				Gains				Losses				Fair Value
July 3, 2009
U.S. government and state agencies		$	75,020			$	444			$	¾			$	75,464
U.S. corporate debt securities			49,183				131				(15	)			49,299
Other debt securities			2,061				116				¾				2,177
Total		$	126,264			$	691			$	(15	)		$	126,940
December 31, 2008
U.S. government and state agencies		$	70,396			$	476			$	(12	)		$	70,860
Corporate debt securities			66,360				81				(761	)			65,680
Other debt securities			10,732				¾				¾				10,732
Total		$	147,488			$	557			$	(773	)		$	147,272

Impairment of Investments

We monitor our investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in our industry; and our relative competitive position within the industry. At the present time, we do not intend to sell our investments that have unrealized losses in accumulated other comprehensive income (loss). In addition, we do not believe that it is more likely than not that we will be required to sell our investments that have unrealized losses in accumulated other comprehensive income (loss) before we recover the principal amounts invested. We believe that the unrealized losses are temporary and do not require an other-than-temporary impairment, based on our evaluation of available evidence as of July 3, 2009.

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

NOTE 5: INVENTORIES

		July 3,				December 31,
(In thousands)		2009				2008
Raw materials		$	5,914			$	5,562
Work-in-process			4,681				1,167
Finished goods			23,768				20,146
		$	34,363			$	26,875

NOTE 6: GOODWILL AND IDENTIFIED INTANGIBLES

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

		July 3, 2009												December 31, 2008
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Identified intangibles:
Patents/Existing/Core technology		$	63,117			$	(43,722	)		$	19,395			$	49,307			$	(39,838	)		$	9,469
In-process technology			2,400				—				2,400				—				—				—
Customer relationships/contracts			37,901				(32,963	)			4,938				33,895				(32,550	)			1,345
Trademark and trade name			7,377				(4,824	)			2,553				5,244				(4,559	)			685
Supply agreement			3,441				(3,441	)			—				3,386				(3,386	)			—
Maintenance agreements			1,600				(237	)			1,363				600				(121	)			479
Software license, intellectual property and assembled workforce			309				(267	)			42				309				(218	)			91
Backlog			2,000				(1,167	)			833				—				—				—
Subtotal of identified intangibles			118,145				(86,621	)			31,524				92,741				(80,672	)			12,069
Goodwill			63,662				—				63,662				41,674				—				41,674
Total goodwill and other intangibles		$	181,807			$	(86,621	)		$	95,186			$	134,415			$	(80,672	)		$	53,743

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

(In thousands)		Goodwill
Balance as of December 31, 2008		$	41,674
Acquisition of Scopus Video Networks			21,696
Foreign currency translation adjustments			292
Balance as of July 3, 2009		$	63,662

For the three and six months ended July 3, 2009, the Company recorded a total of $3.7 million and $5.6 million of amortization expense for identified intangibles, of which $2.2 million and $3.7 million was included in cost of sales, respectively. For the three and six months ended June 27, 2008, the Company recorded a total of $1.5 million and $3.1 million of amortization expense for identified intangibles, of which $1.4 million and $2.8 million was included in cost of sales, respectively. The estimated future amortization expense of purchased intangible assets with definite lives is as follows:

(In thousands)

						Operating
Years Ending December 31,		Cost of Sales				Expenses				Total
2009 (remaining 6 months)		$	4,414			$	1,904			$	6,318
2010			7,497				2,134				9,631
2011			3,680				2,124				5,804
2012			2,308				1,932				4,240
2013			1,302				1,313				2,615
2014 and thereafter			233				283				516
Total		$	19,434			$	9,690			$	29,124

NOTE 7: RESTRUCTURING AND EXCESS FACILITIES

In the second quarter of 2009, the Company recorded an excess facilities expense of $0.3 million related to the closure of the Scopus New Jersey office. In addition, an expense of $0.5 million was recorded in selling, general and administrative expenses related to severance expenses for terminated Scopus employees and an expense totaling $0.5 million was recorded in cost of sales and operating expenses related to severance expenses for other terminated employees. Substantially all of the severance was paid during the three months ended July 3, 2009.

In the first quarter of 2009, the Company recorded a total of $7.3 million of expenses related to activities resulting from the Scopus acquisition, including the termination of approximately 65 Scopus employees. A charge of $6.3 million was recorded in cost of sales, primarily 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.

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 lease income estimates.

As of July 3, 2009, accrued excess facilities cost totaled $8.6 million, of which $6.7 million was included in current accrued liabilities and $1.9 million in other non-current liabilities. The Company incurred cash outlays of $3.2 million during the first six months of 2009 principally for lease payments, property taxes, insurance and other maintenance fees related to vacated facilities. Harmonic expects to pay approximately $3.3 million of excess facility lease costs, net of estimated sublease income, for the remainder of 2009 and to pay the remaining $5.3 million, net of estimated sublease income, over the remaining lease terms through October 2010.

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

The following table summarizes activities under our U.S. and UK facilities restructuring accrual during the first six months of 2009:

		Excess				Campus				BTL				Scopus
(In thousands)		Facilities				Consolidation				Closure				Facilities				Total
Balance at December 31, 2008		$	7,196			$	3,860			$	320			$	—			$	11,376
Provisions/(recoveries)			—				28				55				331				414
Cash payments, net of sublease income			(2,019	)			(1,117	)			(57	)			(28	)			(3,221	)
Balance at July 3, 2009		$	5,177			$	2,771			$	318			$	303			$	8,569

NOTE 8: CREDIT FACILITIES AND LONG-TERM DEBT

Harmonic has a bank line of credit facility with Silicon Valley Bank, which provides for borrowings of up to $10.0 million that matures on March 3, 2010. As of July 3, 2009, other than standby letters of credit and guarantees (Note 15), there were no amounts outstanding under the line of credit facility and there were no borrowings in 2008 or 2009. This facility, which was amended and restated in March 2009, contains a financial covenant with the requirement for Harmonic to maintain cash, cash equivalents and short-term investments, net of credit extensions, of not less than $40.0 million. If Harmonic is unable to maintain this cash, cash equivalents and short-term investments balance, Harmonic would be in noncompliance with the facility. In the event of noncompliance by Harmonic with the covenant under the facility, Silicon Valley Bank would be entitled to exercise its remedies under the facility which include declaring all obligations immediately due and payable. At July 3, 2009, Harmonic was in compliance with the covenants under this line of credit facility. Future borrowings pursuant to the line would bear interest at the bank’s prime rate (4.0% at July 3, 2009). Borrowings are payable monthly and are not collateralized.

NOTE 9: BENEFIT PLANS

Stock Plans. Harmonic has reserved 17,316,000 shares of Common Stock for issuance under various employee stock plans. Stock options are granted for periods not exceeding ten years and generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. Restricted stock units generally have no exercise price and vest over four years with 25% vesting at one year from date of grant or the vesting commencement date chosen for the award, and either an additional 1/16 per quarter thereafter, or 1/8 semiannually thereafter. Stock options are granted having exercise prices equal to the fair market value of the stock at the date of grant. Beginning on February 27, 2006, option grants have a term of seven years. Certain option awards provide for accelerated vesting if there is a change in control. In the first six months of 2009, employees received restricted stock units valued at $6.8 million, which will begin vesting on February 15, 2010.

Director Plans. In May 2002, Harmonic’s stockholders approved the 2002 Director Option Plan (the “Plan”), replacing the 1995 Director Option Plan. In June 2006, Harmonic’s stockholders approved an amendment to the Plan and increased the maximum number of shares of common stock authorized for issuance over the term of the Plan by an additional 300,000 shares to 700,000 shares and reduced the term of future options granted under the Plan to seven years. In May 2008, Harmonic stockholders approved amendments to the Plan and increased the maximum number of shares of common stock authorized for issuance by an additional 100,000 to 800,000 shares. Harmonic had a total of 496,000 shares of Common Stock reserved for issuance under the Plan as of July 3, 2009. The Plan provides for the grant of non-statutory stock options or restricted stock units to certain non-employee directors of Harmonic. Restricted stock units, or RSUs, generally have no exercise price and vest either after one year or the vesting commencement date chosen for such award. Restricted stock units granted reduce the number of shares reserved for grant under the Plan by two shares for every unit granted. Stock options are granted at fair market value of the stock at the date of grant for periods not exceeding ten years. Initial option grants generally vest monthly over three years, and subsequent grants generally vest monthly over one year. During the first six months of 2009 a total of 99,463 restricted stock units were granted to non-employee directors with a fair value of $0.5 million on the date of grant, which will vest on February 15, 2010. In the third quarter of 2008, a total of 71,883 restricted stock units were granted to non-employee directors with a fair value of $0.6 million on the date of grant, which vested on May 15, 2009 and 71,883 shares of common stock were issued.

A summary of share-based awards available for grant are as follows (in thousands):

		Share-Based
		Awards Available
(In thousands except exercise price)		for Grant
Balance at December 31, 2008			7,312
Options granted			(800	)
Restricted stock units granted			(1,398	)
Share-based awards canceled/forfeited			639
Balance at July 3, 2009			5,753

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

						Weighted
		RSUs				Average Price				Aggregate Fair
(In thousands except exercise price)		Outstanding				Per Share				Value (1)
Balance at December 31, 2008			72			$	7.79
Restricted stock units granted			1,298				5.64
Restricted stock units exercised			(72	)			7.79			$	371
Restricted stock units canceled			(5	)			5.64
Balance at July 3, 2009			1,293			$	5.64

The weighted-average fair value of restricted stock units granted for the six months ended July 3, 2009 and June 27, 2008 was $5.64 and $7.79, respectively.

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, 2008			10,798			$	10.50
Options granted			800				5.66
Options exercised			(101	)			4.88
Options canceled			(656	)			13.19
Options expired			(76	)			27.10
Balance at July 3, 2009			10,765			$	9.91
Options vested and exercisable as of July 3, 2009			6,755			$	11.27
Options vested and expected-to-vest as of July 3, 2009			10,610			$	9.95

The weighted-average fair value of options granted for the six months ended July 3, 2009 and June 27, 2008 was $2.86 and $3.78, respectively.

		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		July 3, 2009				(Years)				Exercise Price				July 3, 2009				Exercise Price
(In thousands, except exercise price and life)
$        0.19 -- 5.63			1,484				5.5			$	4.73				644			$	3.74
5.66 -- 6.67			1,603				4.3				5.93				1,400				5.92
6.91 -- 8.17			2,772				5.8				8.11				902				8.11
8.20 -- 8.65			1,839				4.7				8.26				1,037				8.26
8.69 -- 10.19			1,466				3.3				9.16				1,276				9.14
10.25 -- 23.56			1,279				2.4				15.69				1,174				16.11
31.56 -- 121.68			322				0.6				58.92				322				58.92
			10,765				4.5			$	9.91				6,755			$	11.27

The weighted-average remaining contractual life for all exercisable stock options at July 3, 2009 was 3.7 years. The weighted-average remaining contractual life of all vested and expected-to-vest stock options at July 3, 2009 was 4.4 years.

Aggregate pre-tax intrinsic value of options exercisable at July 3, 2009 was $1.3 million. The aggregate intrinsic value of stock options vested and expected-to-vest net of estimated forfeitures was $1.5 million at July 3, 2009. The aggregate intrinsic value of restricted stock units vested and expected-to-vest, net of estimated forfeitures, was $6.9 million at July 3, 2009. Aggregate pre-tax intrinsic value represents the difference between our closing price on the last trading day of the fiscal period, which was $5.74 as of July 3, 2009, and the exercise price multiplied by the number of options outstanding or exercisable. The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the current market value at the time of exercise. The aggregate intrinsic value of exercised stock options was $0.1 million and $0.2 million during the three and six months ended July 3, 2009, respectively. The aggregate intrinsic value of exercised stock options was $0.9 million and $1.3 million during the three and six months ended June 27, 2008, respectively

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 our stockholders, a total of 7.5 million shares have been approved for issuance pursuant to the 2002 Purchase Plan. In addition, in June 2006, our stockholders approved an amendment to the 2002 Purchase Plan to reduce the term of future offering periods to six months which amendment 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 six months of 2009 and 2008, the number of shares of stock issued under the purchase plan were 705,206 and 229,808 shares at weighted average prices of $5.24 and $7.58, respectively. The weighted-average fair value of each right to purchase shares of common stock granted under the purchase plan was $2.22 and $3.04 for the first six months of 2009 and 2008, respectively. At July 3, 2009, there were 2,639,873 shares reserved for future issuances under the 2002 Purchase Plan.

Retirement/Savings Plan. Harmonic has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to 20% of total compensation, subject to applicable Internal Revenue Service limitations. Harmonic can make discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants up to a maximum contribution per participant of $1,000 per year. This employer contribution was suspended during the first quarter of 2009.

The following table summarizes stock-based compensation costs in our Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2009 and June 27, 2008:

		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands)		2009				2008				2009				2008
Employee stock-based compensation in:
Cost of sales		$	373			$	267			$	710			$	494
Research and development expense			929				682				1,799				1,236
Selling, general and administrative expense			1,267				782				2,434				1,520
Total employee stock-based compensation in operating expense			2,196				1,464				4,233				2,756
Total employee stock-based compensation			2,569				1,731				4,943				3,250
Amount capitalized as inventory			(18	)			3				4				6
Total stock-based compensation		$	2,551			$	1,734			$	4,947			$	3,256

As of July 3, 2009, total unamortized stock-based compensation cost related to unvested stock options and restricted stock units was $21.5 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average amortization period of 2.8 years.

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
		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
		2009				2008				2009				2008
Expected life (years)			4.75				4.75				4.75				4.75
Volatility			60	%			51	%			60	%			51	%
Risk-free interest rate			2.3	%			3.1	%			1.7	%			3.1	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

		Employee Stock Purchase Plan
		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
		2009				2008				2009				2008
Expected life (years)			0.5				0.5				0.5				0.5
Volatility			82	%			47	%			78	%			47	%
Risk-free interest rate			0.6	%			2.5	%			0.6	%			2.5	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

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

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

NOTE 10: INCOME TAXES

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate to the pre-tax income (loss) for the period. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings, the impact existing US, state and foreign tax laws have to the jurisdiction in which the earnings will be generated, 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, adjustments with respect to valuation allowances, the impact foreign currency fluctuations have on unrecognized tax benefits or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated effective annual income tax rate.

For the six months ended July 3, 2009, our effective tax rate, which includes discrete items, was (98.5%) compared to (52.3%) for the same period a year ago. The difference between our effective tax rate and the federal statutory rate of 35% is primarily attributable to the differential in foreign tax rates, non deductible SFAS 123(R) stock compensation expense, non-deductible acquisition costs, income tax credits, and various discrete items. Discrete items increased the effective tax rate for the six months ended July 3, 2009 by approximately 56%, which principally relates to new California tax legislation, the recording of a valuation allowance against the future use of California tax credits and foreign currency translation losses for certain unrecognized tax benefits.

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

In compliance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48”), the Company had gross unrecognized tax benefits, which include interest and penalties of approximately $50.5 million as of December 31, 2008, and approximately $51.5 million as of July 3, 2009. If all of these unrecognized tax benefits were recognized, the entire amount would impact the provision for income taxes. We anticipate the unrecognized tax benefits to decrease by $2.9 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 six months ended July 3, 2009, we recorded $0.5 million for interest and penalties related to uncertain tax positions resulting in a balance at July 3, 2009 of $4.4 million.

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

NOTE 11: NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of the common shares outstanding during the period. The diluted net loss per share is the same as basic net loss per share for the three and six months ended July 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.

		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands)		2009				2008				2009				2008
Potentially dilutive equity awards outstanding			9,618				8,852				10,132				9,024

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

		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands, except per share data)		2009				2008				2009				2008
Net income (loss) (numerator)		$	(7,919	)		$	25,464			$	26,763			$	38,818
Shares calculation (denominator):
Weighted average shares outstanding — basic			95,703				94,229				95,563				94,143
Effect of dilutive securities:
Future issued common stock related to Rhozet acquisition			—				201				—				201
Potential common stock relating to equity awards outstanding			—				768				—				784
Average shares outstanding — diluted			95,703				95,198				95,563				95,128
Net income (loss) per share — basic		$	(0.08	)		$	0.27			$	(0.28	)		$	0.41
Net income (loss) per share — diluted		$	(0.08	)		$	0.27			$	(0.28	)		$	0.41

NOTE 12: COMPREHENSIVE INCOME (LOSS)

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

		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands)		2009				2008				2009				2008
Net income (loss)		$	(7,919	)		$	25,464			$	(26,673	)		$	38,818
Change in unrealized gain (loss) on investments, net			355				(277	)			690				(170	)
Change in unrealized gain (loss) on foreign exchange contracts, net			205				—				205				—
Foreign currency translation			448				(10	)			300				161
Total comprehensive income (loss)		$	(6,911	)		$	25,177			$	(25,478	)		$	38,809

NOTE 13: SEGMENT INFORMATION

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

Revenue Information:

		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands)		2009				2008				2009				2008
Revenue by type:
Video processing products		$	31,711			$	34,082			$	62,232			$	68,868
Edge and access products			32,216				41,498				55,769				81,162
Service and support			10,780				6,931				18,629				14,060
Software and other			6,586				6,829				12,419				12,527
Total		$	81,293			$	89,340			$	149,049			$	176,617

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								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands)		2009				2008				2009				2008
Net sales:
United States		$	46,532			$	44,304			$	78,650			$	97,897
International			34,761				45,036				70,399				78,720
Total		$	81,293			$	89,340			$	149,049			$	176,617
Property and equipment:
United States		$	11,644			$	12,170
International			8,115				2,511
Total		$	19,759			$	14,681

Major Customers. For the three and six months ended July 3, 2009, sales to Comcast accounted for 19% and 17% of net sales, respectively. For the three months ended June 27, 2008, sales to Comcast accounted for 18% of net sales. For the six months ended June 27, 2008, sales to Comcast and EchoStar accounted for 17% and 13% of net sales, respectively. As of July 3, 2009, one customer accounted for 19% of net accounts receivable.

NOTE 14: RELATED PARTY

A director of Harmonic is also a director of JDS Uniphase Corporation, from whom the Company purchases products used in the manufacture of our products. Product purchases from JDS Uniphase were insignificant for the three months ended July 3, 2009 and approximately $0.1 million for the six months ended July 3, 2009. As of July 3, 2009, Harmonic’s liabilities to JDS Uniphase were insignificant.

NOTE 15: GUARANTEES

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

		Three Months Ended								Six Months Ended
		July 3,				June 27,				July 3,				June 27,
(In thousands)		2009				2008				2009				2008
Balance at beginning of the period		$	6,919			$	5,622			$	5,360			$	5,786
Scopus acquisition			—				—				2,379				—
Accrual for current period warranties			613				689				1,246				1,766
Adjustments for preexisting warranties			—				586				—				586
Warranty costs incurred			(1,421	)			(1,263	)			(2,874	)			(2,504	)
Balance at end of the period		$	6,111			$	5,634			$	6,111			$	5,634